Proven option strategies tailored for commodity markets — from income generation on gold to volatility plays on crude oil and cross-commodity ratio trades.
If you hold physical gold, silver, or commodity futures, selling covered calls generates regular income while you maintain your long position. This is the most conservative commodity option strategy.
You hold 100 grams of physical gold (or 1 lot of Gold Mini futures) at current price Rs 72,000/gram. Sell 1 lot Gold Mini Rs 74,000 CE (2,000 points OTM) expiring next month for Rs 350/gram.
Premium collected: Rs 350 x 100 = Rs 35,000. Monthly yield: Rs 35,000 / Rs 72,00,000 = 0.49%.
If gold stays below Rs 74,000 — you keep the full Rs 35,000 premium (5.8% annualized yield).
If gold rises above Rs 74,000 — you effectively sell gold at Rs 74,350 (strike + premium), a 3.3% gain from current price. A satisfactory outcome either way.
Hold 1 lot crude oil futures at Rs 6,200/barrel. Sell Rs 6,500 CE for Rs 70/barrel = Rs 7,000 premium. Monthly yield: 1.1%. If crude stays below Rs 6,500, repeat monthly. Crude's higher volatility means richer premiums compared to gold.
Jewellers, refineries, and investors holding commodity positions use protective puts as insurance against sudden price drops. The cost is the option premium — think of it as an insurance premium.
A jeweller holds Rs 50 lakhs worth of gold inventory (approx 700 grams at Rs 72,000/gram). Worried about a price drop before the wedding season.
Hedge: Buy 7 lots of Gold Mini Rs 70,000 PE for Rs 300/gram.
Cost: Rs 300 x 100 x 7 = Rs 2,10,000 (4.2% of inventory value for 1-month protection).
If gold drops to Rs 68,000: Put gains Rs 2,000/gram x 700 = Rs 14,00,000. Inventory loss: Rs 4,000/gram x 700 = Rs 28,00,000. Net loss: Rs 28L - Rs 14L - Rs 2.1L = Rs 11.9L (vs Rs 28L without hedge).
If gold stays above Rs 70,000: Put expires worthless. Cost of insurance = Rs 2.1 lakhs. Inventory value maintained.
A defined-risk, defined-reward strategy for bullish gold views. Cheaper than buying a naked call because the sold call subsidizes the purchased call.
Setup: Gold Mini at Rs 72,000. Buy Rs 72,000 CE at Rs 700/gram. Sell Rs 74,000 CE at Rs 200/gram.
Net Premium: Rs 500/gram = Rs 50,000 per lot (max loss)
Max Profit: (Rs 74,000 - Rs 72,000 - Rs 500) x 100 = Rs 1,50,000
Breakeven: Rs 72,000 + Rs 500 = Rs 72,500/gram
Risk-Reward: 1:3 — risking Rs 50,000 to make Rs 1,50,000
Best Used: Before Dhanteras/Akshaya Tritiya seasonal rallies, or when gold is at a technical support level
When you expect crude oil to decline (global recession fears, demand destruction, OPEC+ compliance issues), a bear put spread provides a cost-effective bearish bet.
Crude oil at Rs 6,200/barrel. Buy Rs 6,200 PE at Rs 150/barrel. Sell Rs 5,800 PE at Rs 50/barrel. Net cost: Rs 100/barrel = Rs 10,000 per lot.
Max profit: (Rs 6,200 - Rs 5,800 - Rs 100) x 100 = Rs 30,000 per lot (if crude falls to Rs 5,800 or below).
Risk-reward: 1:3. Breakeven at Rs 6,100/barrel. Works well during periods of weakening global demand or rising US crude inventories.
Natural gas and crude oil have extreme volatility that can make strangles (buying OTM call + OTM put) highly profitable around key events.
Calendar spreads exploit time decay differences between near-month and far-month options. In commodities, these work especially well for seasonal patterns.
In August (3 months before Diwali), sell near-month September CE and buy far-month November CE at the same strike. The September option decays faster (less time value) while the November option retains value as Diwali demand approaches. If gold stays near the strike in September, the near-month expires worthless while the far-month gains from seasonal demand.
In September, sell October nat gas CE and buy December CE. October is still shoulder season (lower prices), but December captures winter demand. If nat gas stays flat in October, near-month expires worthless. As winter approaches, December option gains value from both seasonal demand expectations and rising IV.
Gold, being the least volatile major commodity, is best suited for iron condors — a range-bound strategy that profits from time decay when gold stays within a defined range.
Setup: Gold Mini at Rs 72,000/gram
Call side: Sell Rs 74,000 CE at Rs 200, Buy Rs 75,000 CE at Rs 100
Put side: Sell Rs 70,000 PE at Rs 180, Buy Rs 69,000 PE at Rs 80
Net Premium: (Rs 200 + Rs 180) - (Rs 100 + Rs 80) = Rs 200/gram = Rs 20,000 per lot
Max Loss: Rs 1,000 - Rs 200 = Rs 800/gram = Rs 80,000 per lot (if gold goes beyond either wing)
Profit Range: Rs 70,000 to Rs 74,000 (Rs 4,000 range or ~5.5% of gold price)
Success Rate: Gold stays within a 5% range about 70% of the time in a month, making this a high-probability trade
Gold has historically low or negative correlation with Indian equities. During market crashes, gold typically rises. This makes gold options useful as portfolio hedges — but in a specific way.
You hold Rs 50 lakh equity portfolio (Nifty-correlated). Worried about a market crash.
Instead of buying expensive Nifty put options, buy gold call options as a hedge.
Logic: Market crash typically causes gold to rise (safe-haven buying, rate cut expectations). Buy Gold Mini Rs 74,000 CE for Rs 300/gram = Rs 30,000 per lot. Buy 2-3 lots for Rs 60,000-90,000.
If market crashes 10-15%: Gold typically rises 5-10%. Your gold calls could return 3-5x premium (Rs 1.8-4.5 lakhs), offsetting some equity losses.
If market stays stable: Gold calls expire worthless. Cost of hedge: Rs 60,000-90,000 (1.2-1.8% of portfolio). Think of it as insurance premium.
This is cheaper than buying Nifty puts (which have higher IV premium) and provides genuine diversification.
The gold-silver ratio (GSR) mean-reverts between 60-85. When GSR is above 80, silver is cheap relative to gold. Buy silver calls and buy gold puts simultaneously. When GSR is below 60, silver is expensive — reverse the trade. This is a relative value trade where absolute price direction matters less than the ratio convergence.
During risk-off events, gold rises and crude falls. During risk-on events, crude rises and gold falls. If you expect a risk-off event (geopolitical crisis, banking stress), buy gold calls and crude puts simultaneously. The two positions reinforce each other during the event. Use options to define your maximum risk on both sides.
Historically, crude and natural gas prices maintain a rough ratio (crude/nat gas ~ 10-15x on energy-equivalent basis). When the ratio stretches to extremes (above 25 or below 8), mean reversion trades can be profitable. Use options to capture the convergence with limited downside.
Iron condors, covered calls, calendar spreads. Gold's relatively low volatility (12-18% IV) suits income-generating, range-bound strategies. Directional plays need patience.
Bull/bear spreads, straddles, ratio trades. Silver's 20-30% IV offers richer premiums than gold but narrower ranges than crude. Good for directional spreads with defined risk.
Strangles around events, weekly option plays, bear put spreads. Crude's 25-40% IV and frequent binary events (OPEC, EIA) make it ideal for event-driven option buying.
Buy strangles before winter, sell iron condors in summer. Nat gas IV of 40-80% means premiums are expensive — only buy options around clear catalysts. Never sell naked.
Commodity options trade extended hours, have different liquidity profiles, and commodities can be influenced by weather, geopolitics, and supply disruptions that have no equity equivalent. Adapt strategies to each commodity's unique characteristics, volatility, and trading hours.
Commodities can make extreme moves. Crude oil went negative in 2020. Natural gas tripled in 2022. Gold can gap Rs 1,000+ on geopolitical events. Naked option selling on commodities has unlimited risk. Always use defined-risk strategies (spreads, condors). Never sell naked commodity options.
Natural gas is 3-4x more volatile than gold. Using the same lot count across commodities creates wildly unequal risk exposure. Size positions based on volatility: if you trade 3 lots of gold, trade 1 lot of nat gas for equivalent risk.
Cross-commodity trades reduce but do not eliminate risk. Both legs can move against you simultaneously in unusual market conditions (liquidity crisis, exchange holidays). Always use options for cross-commodity trades to cap maximum loss on both sides.
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