Both options
Also written Both options to deliver · Both option settlement
A commodity futures settlement type in which physical delivery happens only if both the buyer and seller agree to it — if either declines, the open position is cash-settled at the Due Date Rate instead.
In plain language
Some commodity futures contracts force delivery on everyone left open at expiry. Others give traders a choice, but only if both sides want it.
Under a both options contract, delivery happens only when the buyer and the seller both opt for it. If even one of them says no, the position is settled in cash instead of physical goods changing hands.
How it works
The workbook lists three settlement options available in the commodity futures market: compulsory delivery, both options, and cash settlement. Under both options, delivery is executed only when both the buyer and the seller agree to take or give delivery. If either party does not opt for delivery, such open positions are cash-settled at the Due Date Rate (DDR).
The Due Date Rate — also called the Final Settlement Price (FSP) — is usually the average of polled spot prices over the last few days of the futures contract, as defined by the exchange's contract specification, and it varies by commodity. For electricity, it is the volume-weighted average of all days in the expiring month; for most other commodities, it is typically an average over 3 to 5 days.
A worked example
A "both options" base metal contract worth Rs 10,00,000 (illustrative) is approaching expiry. A fabricator holding a long position wants physical delivery of the metal for its production line, but the counterparty on the short side — a proprietary trader with no physical use for the metal — does not want to arrange delivery.
Because delivery under a "both options" contract requires both sides to agree, the fabricator's wish alone is not enough. The position is instead cash-settled at the Due Date Rate — say Rs 10,20,000 on this contract (illustrative) — and the fabricator has to separately source the physical metal it needs from the spot market, paying about Rs 20,000 more than the price it had originally locked in. This is a different outcome from a compulsory delivery contract like gold, where an unsquared open position forces delivery regardless of either party's preference.
Why NISM asks about it
Chapter 7, section 7.3.2, sets out both options immediately after compulsory delivery, and the two are consistently tested as a contrasting pair, alongside pure cash settlement. Expect a question asking what happens if only one side of a "both options" contract wants delivery — the answer is cash settlement at the DDR, not forced delivery.
Common exam traps
- Both sides must agree for delivery to happen — one side wanting it is not enough. This is the opposite of compulsory delivery, where neither side has a choice.
- If delivery does not happen, the fallback is cash settlement at the Due Date Rate, not a default or a penalty — this is a designed feature of the contract type, not a failure state.
- The Due Date Rate's averaging window differs by commodity — electricity uses a full-month volume-weighted average, while most others use roughly 3–5 days; do not assume one fixed formula applies everywhere.
Check yourself
1.A contract follows the 'both options' delivery logic. At expiry the buyer wants to take delivery, but the seller matched against him does not opt to give delivery. What happens to the open position?
- a)It is cash settled at the Due Date Rate
- b)The seller is compelled to deliver, as under compulsory delivery
- c)The seller is charged the delivery default penalty of 4% of the settlement price
- d)The position is rolled into the next month's contract
Show the answer
Answer: (a) It is cash settled at the Due Date Rate
The workbook's words: "In the case of a both options, the delivery will be executed ONLY WHEN BOTH BUYERS AND SELLERS AGREE to take/give delivery. EVEN IF ONE OF THEM in a trade DO NOT OPT FOR DELIVERY, such open positions are CASH SETTLED AT THE DUE DATE RATE (DDR)." So option (a) is right.
The three settlement options: "at present three settlement options are available to the buyer/seller: COMPULSORY DELIVERY, BOTH OPTIONS AND CASH SETTLEMENT."
Why the others are wrong:
- (b) describes compulsory delivery, where "both the buyer and seller with an open position during the tender/delivery [period]... are obligated to take/give delivery." Under 'both options' neither side can be forced.
- (c) The delivery default penalty applies when a seller who is obliged to deliver fails to do so. Here the seller had no such obligation, so there is no default.
- (d) Contracts are not rolled over automatically. Open positions at expiry are settled.
What the DDR is: the DDR (or FSP) "is usually the AVERAGE OF SPOT PRICES (POLLED) IN LAST FEW DAYS of Futures contract as defined per the contract specification". For electricity it is the volume weighted average of all the days in the expiring month; for other commodities it may be 3–5 days.
2.As per current regulatory norms, which style of commodity options may be launched on Indian exchanges, for both Options on Futures and Options on Goods?
- a)Only European style — exercisable only on the expiry date/day
- b)Only American style — exercisable any time on or before expiry
- c)American style for Options on Futures and European style for Options on Goods
- d)Either style, at the exchange's choice for each contract
Show the answer
Answer: (a) Only European style — exercisable only on the expiry date/day
"European option: The owner of such option can exercise his right ONLY ON THE EXPIRY DATE/DAY of the contract. As per current regulatory norms, ONLY EUROPEAN STYLE COMMODITY OPTIONS ARE PERMITTED to be launched in the case of 'Options on Futures' and in the case of Options on Goods traded in the Indian derivatives exchanges."
American style, for contrast: "the options buyer has the option to exercise his right... on or before the expiry of the options contract. The owner of such option can exercise his right AT ANY TIME ON OR BEFORE THE EXPIRY DATE."
Why the other options are wrong:
- (b) American style is defined in the workbook but is not permitted for Indian commodity options.
- (c) Both types are European. Chapter 4 lists "European Options" among the fundamentals that are the same for both Options on Futures and Options on Goods.
- (d) Exchanges have no choice here. The regulatory norm fixes the style.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Final Settlement PriceThe price at which a commodity derivative is finally settled at expiry — a simple average of the polled spot prices of the expiry day and the two days before it.
- Compulsory deliveryA delivery logic under which every position still open at expiry must give or take physical delivery — neither side can elect to settle in cash.
- Delivery default penaltyThe SEBI-prescribed charge on a seller who fails to deliver against an expiring contract — a fixed percentage of the settlement price plus a replacement cost, most of which is paid over to the buyer.
- Electricity futuresExchange-traded, cash-settled contracts that let participants lock in a price for round-the-clock electricity delivery over a month, up to three months ahead, without any physical delivery obligation.
- SettlementThe step where the obligations computed by clearing are actually discharged — commodities against funds on a delivery-versus-payment basis, or cash against the settlement price.
- Expiry-day square-off rightA member's right, not obligation, to leave a client's position open on the last day of a contract unless the client expressly asks for it to be squared off.