Learn commodity trading basics

4.2.5 · Stock-Market › What to Trade

Commodities HAIN kya?

Fungibility kyun matter karti hai: Yeh standardized contracts aur transparent pricing allow karta hai. Aapko "is particular wheat" ko "us wheat" se compare karke inspect nahi karna—Chicago wheat contract ek Chicago wheat contract hi hota hai.

Commodities ki Categories

1. Energy: Crude oil, natural gas, gasoline, heating oil
2. Metals:
   • Precious: Gold, silver, platinum, palladium
   • Industrial: Copper, aluminum, zinc, nickel
3. Agricultural:
   • Grains: Wheat, corn, soybeans, rice
   • Soft: Coffee, cocoa, cotton, sugar
   • Livestock: Live cattle, lean hogs

Same metal category, opposite drivers.

Commodity Trading Kaise Kaam Karta Hai

Contract Structure

Example: Ek COMEX Gold futures contract =

• Commodity: Gold
• Quantity: 100 troy ounces
• Quality: Minimum 99.5% purity
• Delivery: Contract month mein koi bhi business day
• Location: New York mein COMEX-approved vaults

Yeh specification kyun? Standardization se pehle, har gold trade mein negotiation lagti thi: "Kitna pure? Kab? Kahan?" Standardization → liquidity → price discovery.

Spot vs. Futures

Dono ke beech relationship:

$F=S\cdot e^{(r+u-y)(T-t)}$

Jahan:

• $F$ = Futures price
• $S$ = Spot price
• $r$ = Risk-free rate
• $u$ = Storage costs (% per year)
• $y$ = Convenience yield
• $(T-t)$ = Time to delivery in years

First principles se Derivation:

1. Arbitrage-free pricing se shuru karo: Agar main aaj spot price $S$ par physical commodity khareedoon aur ek futures contract $F$ par sell karoon, toh main ek profit/loss lock kar leta hoon.

2. Physical carry karne ka cost: Commodity hold karne mein paisa lagta hai:

   • Financing cost: Mujhe time $(T-t)$ ke liye capital $S$ chahiye, jiske liye $S\cdot e^{r(T-t)}$ cost aata hai
   • Storage cost: Rate $u$ per year par physical storage = $S\cdot e^{u(T-t)}$

3. Physical hold karne ka benefit (convenience yield): Physical commodity own karne ki value hoti hai—manufacturers ko production ke liye chahiye, aap ek futures contract par refinery nahi chala sakte. Yeh benefit convenience yield $y$ hai.

4. No-arbitrage condition: $F=S\cdot e^{r(T-t)}\cdot e^{u(T-t)}\cdot e^{-y(T-t)}=S\cdot e^{(r+u-y)(T-t)}$

$F>S$ (contango) kab hota hai? Jab storage + financing costs convenience yield se zyada hon. Gold ke liye common (high storage, low convenience).

$F<S$ (backwardation) kab hota hai? Jab convenience yield carry costs se zyada ho. Oil ke liye supply squeezes mein common—refineries immediate delivery ke liye premium deti hain.

Dhundho: Theoretical 6-month futures price

Solution: $F=S\cdot e^{(r+u-y)(T-t)}$ $F=4.50\cdot e^{(0.03+0.05-0.02)(0.5)}$ $F=4.50\cdot e^{0.06\times 0.5}$ $F=4.50\cdot e^{0.03}$ $F=4.50\cdot 1.0305$ $F=\$4.64\text{ per bushel}$

Har step kyun?

• Step 1: Cost-of-carry formula apply karo
• Step 2: Values plug in karo (note: rates as decimals)
• Step 3: Exponent combine karo $0.06\times 0.5=0.03$
• Step 4: $e^{0.03}\approx 1.0305$ calculate karo
• Step 5: Futures price paane ke liye multiply karo

Interpretation: Futures price spot se $0.14$ zyada hai kyunki net carry cost $(3\%+5\%-2\%=6\%$ annual) 6 months mein price mein ~3% add karta hai. Yeh contango hai.

Trading Mechanisms

1. Futures Exchanges

• MCX (India): Gold, silver, crude oil, copper, natural gas
• NCDEX (India): Agricultural commodities
• COMEX (US): Metals
• CME (US): Energy, agriculture
• ICE (International): Energy, soft commodities

2. Spot/Physical Markets

• OTC (Over-The-Counter): Parties ke beech direct contracts
• Bullion dealers: Physical gold/silver
• Commodity ETFs: Futures rolling ke bina spot prices track karte hain (e.g., GOLD ETF)

Futures contract:

• Gold futures (MCX): 1 kg contract
• Gold price: ₹60,000 per 10g = ₹60,000 per kg
• Margin required: ~5% = ₹3,00,000

Physical gold:

• 100g at ₹60,000 per 10g = ₹6,00,000 upfront
• Koi leverage nahi

Yeh step kyun? Futures 20x leverage offer karte hain (5% margin = 1/0.05 = 20). Gold price ka 5% move = aapke margin par 100% gain/loss.

Risk yeh hai: Agar gold 3% girta hai, toh aap ₹3,00,000 margin par ₹1,80,000 lose karte ho = capital ka 60%. Broker margin call issue karega aur zyada funds deposit karne ko bolega ya auto-liquidate kar dega.

Key Pricing Factors

$P_t=f(\text{Supply},\text{Demand},\text{Inventory},\text{Speculation},\text{USD strength})$

Supply factors:

• Weather (agriculture ke liye droughts, floods)
• Geopolitics (OPEC decisions, sanctions)
• Production costs (mining, drilling)
• Technology (fracking ne US oil unlock kiya)

Demand factors:

• Economic growth (industrial metals)
• Seasonal patterns (winter mein heating oil)
• Substitution (electric vehicles → less oil demand)

Inventory levels:

• High inventory → oversupply → lower prices
• Low inventory → scarcity → higher prices + backwardation

Spike kyun hua?

1. Strong emerging market demand (China, India)
2. Weak dollar (oil priced in USD)
3. Speculation (hedge funds ka pile in)
4. Supply fears (Nigeria unrest, hurricane season)

Crash kyun hua?

1. Demand destruction: Global financial crisis → recession → less oil consumption
2. Deleveraging: Hedge funds forced to sell to meet margin calls
3. Inventory build: Weak demand → storage tanks fill → contango

Same commodity, 5 months mein 78% drop. Commodities macroeconomic cycles ko amplify karti hain.

Common Mistakes

Kyun galat hai:

1. Commodities pro-cyclical hain: Yeh economic expansions mein boom karti hain (demand badhti hai) aur recessions mein crash karti hain (demand girti hai), inflation chahe kuch bhi ho.
2. Inflation type matter karta hai:
   • Demand-pull inflation (strong economy) → commodities rise ✓
   • Stagflation (weak economy + inflation) → commodities mixed
   • Deflation → commodities crash despite being "physical"

Example: 2015-2016 mein commodities 30% crash hue ongoing QE aur inflation fears ke bawajood, kyunki China ki growth slow hui (demand factor dominate kiya).

Steel-man: Yeh mistake long-term inflation protection (decades mein, gold CPI track karta hai) ko short-term trading (jahan cyclical demand dominate karti hai) se confuse karti hai.

Fix: Commodities ko supply-demand cycles ke basis par trade karo, sirf inflation dekh kar nahi. Gold exception hai (monetary asset), lekin crude oil, copper, wheat pehle economic cycles follow karte hain.

Kyun galat hai: Futures contracts expire hote hain. Expiry se pehle close nahi kiya toh aapko:

1. Physical delivery leni hogi (storage, quality grading, logistics chahiye)
2. Next contract par roll karna hoga (expiring sell karo, next month buy karo)

Rolling costs (contango/backwardation):

• Contango (next month $F>S$): Aap low par sell, high par buy karte ho → roll par paisa lose hota hai
• Backwardation (next month $F<S$): Aap high par sell, low par buy karte ho → roll par gain hota hai

Example: Oil ETF (USO) 2020 mein 30% lose hua despite oil stabilizing, kyunki yeh steep contango mein roll karta raha—har month next contract ke liye zyada pay karta raha.

Fix:

• Actively trade karo, expiry se pehle close karo
• Commodity ETFs tab hi use karo jab unki rolling strategy samajhte ho
• Long-term ke liye: mining stocks ya physical metal (gold) consider karo

Commodities mein Risk Management

$\text{Contracts}=\frac{A\times R\%}{\text{Contract Value}\times \text{Expected \% Move}}$

Kyun? Loss ko expected adverse move par account ka $R\%$ tak limit karta hai.

Kitne contracts?

Maximum loss allowed: $10,00,000\times 2\%=₹20,000$

Per contract loss at 5% move: $22,50,000\times 5\%=₹1,12,500$

$\text{Contracts}=\frac{20,000}{1,12,500}=0.178\approx 0$

Conclusion: Position bahut badi hai is account ke liye. 2% risk aur 5% stop ke saath safely ek bhi contract trade karne ke liye ₹56,25,000 chahiye honge.

Yeh kyun matter karta hai: Commodity futures ke contract sizes bade hote hain. Chhote accounts ke paas options hain:

1. Mini contracts trade karo (agar available ho)
2. Commodity ETFs trade karo
3. Higher risk per trade accept karo (dangerous)

Commodities Kyun Trade Karein?

1. Portfolio Diversification Stocks/bonds se low correlation. 2022 mein, stocks 18% gire, bonds 13% gire, lekin energy commodities 40% badhe.

2. Inflation Protection (Long-term) Physical goods decades mein purchasing power maintain karte hain.

3. Economic Cycle Plays

• Early expansion: Industrial metals (copper, aluminum)
• Late expansion: Energy (oil, gas)
• Recession: Precious metals (gold as safe haven)

4. Leverage Opportunities Futures directional bets ke liye high leverage offer karte hain (commensurate risk ke saath).

Yaad rakho: "Farmers raise COWS for Gold" → saare major commodity groups.

Connections

• Futures-and-options-basics - Commodity futures ek type ka derivative hain
• Portfolio-diversification-strategies - Commodities as alternative asset class
• Understanding-market-volatility - Commodities high volatility exhibit karti hain
• Technical-analysis-for-trending-markets - Commodities achhi tarah trend karti hain
• Currency-markets-and-forex - USD strength commodity prices ko affect karti hai
• Global-economic-indicators - GDP growth, PMI commodity demand drive karta hai

Lekin kya hoga agar main sure karna chahoon ki 3 months baad bhi tumse ek chocolate bar khareed sakoon? Hum aaj ek deal kar sakte hain: "3 months mein, main tumhari chocolate bar ₹12 mein khareedoonga." Yeh ek futures contract hai.

Main ₹10 ki jagah ₹12 kyun doonga? Kyunki:

1. Tumhe 3 months tak chocolate store karni hai (ise fresh rakhne mein paisa lagta hai)
2. Tum ise aaj bech sakte the aur ₹10 se interest kama sakte the
3. Lekin saath hi, chocolate available hona useful hai—agar chocolate shortage ho jaye, toh tum lucky ho ki tumhare paas hai!

Agar storage chocolate rakhne ki convenience se zyada cost kare, toh main zyada pay karta hoon (₹12). Yeh contango hai. Agar chocolate bahut scarce hai aur sab abhi chahte hain, toh main future chocolate ke liye shayad kam pay karoon (₹9) kyunki aaj uska hona kaafi zyada valuable hai. Yeh backwardation hai.

Ab chocolate ki jagah oil, gold, ya wheat imagine karo. Companies ko factories chalane ke liye, jewelers ko ornaments banane ke liye, bakers ko bread ke liye wheat chahiye. Prices upar-neeche jaati hain based on:

• Kitna available hai (supply)
• Kitne log chahte hain (demand)
• Duniya mein kya ho raha hai (wars, weather, economy)

Commodities trade karna matlab in real cheezoon ke contracts khareedna aur bechna hai. Yeh stocks se riskier hai kyunki:

1. Ek drought raat-raat wheat supply destroy kar sakta hai
2. Aap leverage use kar rahe ho (sirf ₹50,000 margin se ₹10 lakh control karna)
3. Contracts expire hote hain—aap "forever hold" nahi kar sakte

Lekin yeh real-world events se paisa banane ka ek tarika bhi hai, sirf company performance se nahi.

Flashcards

#flashcards/stock-market

Commodity kya hai aur yeh stock se alag kaise hai? :: Commodity ek raw material ya primary agricultural product hai jo fungible (interchangeable) hoti hai. Stocks company ownership represent karte hain jabke commodities tangible physical goods represent karti hain jinki prices physical world ki supply-demand ke basis par move karti hain, corporate earnings par nahi.

Contango vs backwardation define karo :: Contango: futures price > spot price (F > S), tab hota hai jab storage + financing costs convenience yield se zyada hon. Backwardation: futures price < spot price (F < S), tab hota hai jab convenience yield carry costs se zyada ho, tight supply indicate karta hai.

Concept Map