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Ghost trading system
Crude oil is the most actively traded commodity on MCX. The combined value of crude oil across all contracts traded on MCX, on average, exceeds Rupees crores on a daily basis. This translates to roughly barrels of crude oil traded daily. Active market participation in crude oil comes in from both corporate and retail individual traders.
If I were to guess, these institutional orders are mainly to hedge their exposure in the spot physical market. On the other hand, the retail traders mostly speculate on the crude oil prices. With an average daily traded value of Rupees Cr, the big crude oil contract is certainly one of the biggest contracts value wise that gets traded on MCX. The crude oil on MCX is quoted on a per barrel basis one barrel is equal to 42 gallons or about liters.
As you can see, the Crude Oil contract expiring on 19 th Dec is trading at Rs. The lot size is barrels , which means to say that if you want to buy or go long on crude oil, the value of such a contract will be —. This is the contract value of the crude oil, but what about the margins? Unlike the margins on other commodities, the margin on crude oil is slightly higher. Here is the snap shot of the same —. However, if you wish to make an intraday trade using MIS, then the margin requirement is roughly 4.
Clearly, as you can see from the snapshot above, margin under MIS is just Rs. New crude oil contracts are launched every month. The newly introduced crude oil contracts have an expiry scheduled six months later. For example, the contract introduced in November , will have its expiry in 6 months i. MCX puts up this information regularly in their circulars, but I find it a little confusing to interpret the expiry table. Here is what MCX intends to convey —. So, as I write this, its November , which means to say the November contract must have been introduced in May For active trading, always choose the near month contract.
The reason for this is simple. Liquidity is highest for the current month contract November in this example. All the other contracts, even though exist in the market, pretty much lead a meaningless life, until they become current.
The Crude Oil mini is quite a favorite amongst the trading community. The reason for this is straightforward —. The contract value for this would be —. The margin required in percentage terms is little higher — around 9.
Clearly, way lower compared to the margin required for the big Crude oil. The first part of the snapshot captures Crude Oil December future big crude contract along with its market depth. The second part of the snapshot captures the Crude Oil Mini December contract along with its market depth. All else equal, both these contracts at the same time should trade at the same price.
They are not supposed to trade at different prices, since the underlying is the same. In fact, this is what we notice here — both Crude oil contracts trade at Rs. For example Crude Oil is trading at Rs.
Do we have a trading opportunity here? Yes, of course, we do have an arbitrage opportunity here, and here is how we can trade this. We know the rule of thumb in any arbitrage trade — always buy the cheaper asset and sell the expensive one.
So in this case —. We buy the crude oil mini at and sell the crude oil at However, please note, for a perfect arbitrage opportunity, we should always trade similar values. Given this, one should buy 10 lots of Crude oil mini at and sell 1 lot of crude oil at By doing so, the contract sizes are similar and therefore the arbitrage holds.
Once we execute this trade efficiently , the arbitrage profit is locked in. Remember, in all arbitrage cases, the price will converge to a single price point. So assume the price finally converges to —.
It is unlikely you will find such sweet opportunities on a daily basis, and even if you do, algorithms grab them. However, I have occasionally witnessed such opportunities lasting for several minutes. This brings us to the end of our conversation on Crude Oil. We are lucky to have a teacher like you. Request you to kindly suggest books on options trading for enhancing my knowledge. Check out this book — Option volatility and pricing strategies Book by Sheldon Natenberg.
Thanks for the suggestions. After going through your text on Short strangle ,I have become more of a short seller. Sir please tell me , how to rollover current contract to the next month contract in crude oil. Rollover is just about closing the contract that you hold and initiating the position in the next month contract. For example, if you hold a long Crude position in Oct series, then rollover is squaring off Oct Contract and buying Crude in Nov contract.
Check the product page on MCX — https: Hi kartik While using option calculator It asks for 1 underlying price 2 strike price 3 Days to expiry 4 annual interest rate 5 implied volatility call 6 implied volatility put. Have u ever observe the diff in price of two month contract increses and decreases?? If u know why it happens how v can earn from dat please share.
Yes, that is a common phenomenon. Check this chapter — http: Not related to this module. In indian equity market ,we can not keep overnight position of shorted equity stock ,we have to square off it same day. As Futures price is driven by underlying not vice-versa ,So I am confused how above quoted statement is correct.
Why would undelying price would go up in upcoming days? Why such statement is made up for equity stocks? Though this is off topic was just wondering if you can explain in another module or so abut INTRA day trading, about selection of stocks for intraday.
Is there any book where one can refer for intra day trading and selection of stocks for intra day. I have many books about investing but they all carry US stocks examples. Thumbs up for Zerodha for Writing such Topics. Now a days brooking firms are taking only brokerage. Sir, if one executes the above arbitrage of 4 points in zerodha, say 1 big lot and 10 small lots.
Out if this how much do the brokerage and taxes amount to? In other words, what is the minimum difference between crude big and small lots for arbitrage to be profitable? Hi karthik, The expiry date for crude oil is19th of expiry month. Cash settlement can be done on 19th OR for cash settlement we have to square off the position days before the expiry??? In last month, I did not know the expiry date being new to the commodity market.
I had a open buy position in crude mini in the expiry date. I can not not find that position in the next day. Will there be any delivery obligation in future?
I guess the contract would have been settled. Delivery obligation requires some sort of paperwork. Are you referring to a situation where in the demand outstrips supply? I am talking about the inventory data that comes every Wednesday. I interpret if actual no. Is less than previous then supply is less, more demand. Hello Karthik — If the open position is not closed on expiry day then one has to take the physical delivery of commodity or it is cash settled the way it happens in options.
If not, may I know if it is planned to go live anytime soon? Hi Karthik, Why crudeoil futures from one month to another month are at premium? How the fair premium for rollover can be calculated? Check this — http: The link you provided explains theoretical futures pricing in general.
I would like you to explain how the crudeoil futures month to month premium is calculated. Its the actual formula traders use. Premium or discount is a outcome of demand and supply, not sure of this is quantifiable. Dipesh, rollover requires you to close the August contract and initiate the same position in Sept contracts.