• 11 Jan 2024

For those stepping into the expansive realm of investments. It's crucial to recognize the array of opportunities extending beyond equities. In India, commodity trading is emerging. As a popular and lucrative investment avenue. Offering many associated benefits.

One significant advantage is that investment in commodities serves as a hedge against inflation. Contributing to its increasing appeal. But, many investors may lack a clear understanding of the various types. And strategies involved in commodity trading.

This blog aims to shed light on essential details about Commodity Trading. Providing valuable insights for those seeking to navigate this dynamic investment landscape.

Table of Content

Understanding Commodity Trading

Commodities, in essence, are raw materials or standardized resources possessing intrinsic value. They represent vital elements needed for the production and manufacturing of refined goods.

Commodity trading involves the buying, selling, or trading of these commodities. In India, this trading occurs through derivatives contracts. Such as commodity futures and options. The value of these derivative contracts is derived from the underlying commodities.

Typically, commodity trading is conducted in lots, which may include units. Like kilograms of wheat, barrels of oil, or bushels of corn. This standardized approach allows for a systematic. And organized trading framework in the commodities market.

Understanding Types of Commodities:

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Commodities can be classified into two categories: hard commodities and soft commodities.

1. Hard Commodities:These are commodities that are mined or extracted from nature. Examples of hard commodities include precious metals. Like gold and silver, as well as industrial metals like copper.

2. Soft Commodities: Soft commodities are those that are grown, raised, or nurtured. They have a historical significance as some of the oldest traded products globally. Examples of soft commodities encompass agricultural products. Such as pulses, cotton, rice, and sugar.

By recognizing this fundamental distinction. Investors can gain insight into the diverse nature of commodities. And tailor their trading strategies.

Prominent Commodities Traded in the Market:

In the global commodity market. certain commodities stand out as trade, with gold, silver, crude oil, and natural gas. Being among the notable ones in India. Here's a breakdown of traded commodities:

Agriculture:

  • Grains: Rice, wheat, maize, jeera, Basmati rice

  • Pulses: Chana, yellow peas, tur dal, urad

  • Oils and oilseeds: Soy seeds, castor seeds, soy meal, refined soy oil, crude pal, soy meal

  • Spices: Red chili, pepper, jeera, turmeric, and cardamom

Metals and Materials:

  • Bulk commodities: Iron ore, bauxite, coking coal, and steel

  • Base metals: Aluminium, nickel, copper, tin, zinc

  • Others: Chemicals, soda ash, rare earth metals

Precious Metals and Materials:

  • Gold, silver, palladium, and platinum

Energy:

  • Natural gas, crude oil, thermal coal, Brent crude, alternative energy

Services:

  • Mining services, oil services, and others

Understanding the diversity of traded commodities allows investors to navigate the market. With a comprehensive perspective, tailoring their investment strategies. Based on the specific characteristics of each commodity category.

Exploring Commodity Trading Tactics

Traders often use diverse commodity trading strategy when engaging in commodity trading. Two prevalent approaches are spread trading and options trading.

Spread Trading:Spread trading involves simultaneous long and short positions. Either for a single commodity or between related commodities. There are two primary spread trading strategies:

1. Intra-Commodity Spread: This strategy encompasses taking long and short positions in futures contracts of the same commodity. But with different maturity dates. For instance, a trader could buy March futures for rice and sell August futures. Capitalizing on price fluctuations. This strategy includes bull spreads (buying a far-month contract and selling the current month). And bear spreads (the reverse).

2. Inter-Commodity Spread:Traders can use this strategy by taking long and short positions in futures contracts. It's for different yet related commodities. An example could be buying gold futures and selling silver futures.

Options Trading Strategies:

Commodity traders can leverage various options trading strategies, such as:

1. Put Buy and Put Sell: Traders buy/sell put options at different strike prices. This can enjoy anticipated decreases in the underlying commodity's price.

2. Call Buy and Call Sell: In situations where traders expect a rise in commodity prices. They buy/sell call options at varying strike prices, involving a premium payment for buying and a margin for selling.

3. Covered Short Put: This strategy combines selling a put option with holding a long position in the underlying commodity. Offering hedging benefits and improved returns.

4. Covered Short Call: This involves a short call option combined with a long underlying position. Safeguarding against market stagnation and enhancing returns.

5. Strangles and Straddles: Traders may adopt long positions in calls and puts to profit from market volatility changes. A long straddle involves buying call and put options with the same strike price and expiry date. While a long strangle has varying strike prices but the same expiry date.

Trading with Common Indices:

For newcomers in the investment realm. A gradual exposure to commodities can achieved through common indices. These cash-settled contracts, with smaller lot sizes compared to futures contracts. This provides an entry point into the world of commodity trading.

Final Verdict:

Consider commodity trading if you're seeking an investment option that also serves as a hedge against inflation. Commodities can be broadly categorized as hard and soft. Agricultural commodities like rice, grains, pulses, and oils are among the most actively traded.

Commodity Trading Strategies:

Diversified strategies exist for commodity trading. Allowing you to align your approach with specific trading objectives.

To know more you’re free to get in touch with us.

Frequently Asked Questions (FAQs):
1. Who participates in commodity trading in India?

Participants in commodity trading in India primarily include speculators and hedgers. Speculators aim to exit positions within a short timeframe. While hedgers take opposite positions to offset gains and losses from underlying assets.

2. What are some important commodities?

Key commodities traded in India encompass gold, cotton, natural gas, sugar, uranium, wheat, coffee, corn, and crude oil.

3. What is the role of a stock exchange in commodity trading?

Stock exchanges play a crucial role in facilitating commodity derivatives trading. Operating under theregulations of SEBI (Securities Exchange Board of India). Standardized derivatives contracts are available on these exchanges. With specifications determined through consultation with stakeholders.

- NGCB Team

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