Monday, May 25th, 2020

Is It Time for Calls on Copper Futures?


Copper prices went up on news that China is importing more of the metal. Is it time for calls on copper futures or is that premature? The Wall Street Journal reports on rising commodity prices.

Energy and materials companies led the rally amid gains in oil and copper prices.

Copper prices rose after China reported its imports of the metal rose last month. Mining company Freeport McMoRan Inc. added close to 13% to become the biggest gainer in the S&P 500.

Shares in Anglo American PLC gained nearly 8%, while BHP Billiton PLC shares climbed nearly 6%. Europe’s basic resources companies are now up 3% for the year, the only sector in positive territory for 2016.

Also lifting the mood, U.S. oil prices gained 7.4% to $31.84 a barrel on expectations of an accelerated decline in U.S. oil production. The International Energy Agency said Monday that it expects U.S. shale-oil production to fall by 600,000 barrels a day in 2016 and another 200,000 barrels a day in 2017.

Commodity prices go up when demand rises and demand rises when the economy picks up. The issue with China has been that its economy is slowing from the torrid rate of growth that it has experienced for decades. The reduction in commodity orders such as copper has hurt producers and developing economies across the globe. If you want to trade options on copper futures you can start by checking out the CME Group copper futures quotes page where, as of this writing, prices have gone up.

CME Copper Options

CME publishes an online brochure giving the specifics of copper futures (HG) and copper options (HX). These are American style options with a minimum of 10 contracts. Options contracts are listed for the following 22 futures contract months. One contract is for 25,000 pounds of copper or about $52,000 at the current price for a February contract. Ten contracts are for about $520,000 worth of copper. Interestingly the rise in copper price has been followed by a rise in the cost of puts on coffee versus the cost of calls. This applies for strike prices ranging from $2.02 a pound to $2.11 a pound. It would appear that options traders do not, as a group, think that it is time for calls on copper!

Options versus Futures

What is the difference between futures trading and options trading?

The basic difference is the matter of right versus obligation. A buyer of an options contract purchases the right but not the obligation to purchase a stock, commodity, or foreign currency at or before the end of the contract. The seller of the options contract is paid a premium and assumes the obligation to sell, in a call contract, or buy, in a put contract, if the buyer so chooses. Both buyers and sellers of futures contracts are obligated to fulfill their part of the contract. The only option for buyers of futures contracts, which most traders take advantage of, is to exit the contract by making the opposite trade. In this way speculators are not required to take receipt of, or make delivery of, hundreds of head of cattle or a ton or two of gold bullion. Options traders, however, commonly do take delivery of stock that they buy in a successful call option. They will also commonly sell the stock and take their profit.

If you think that orders for copper will rise and the price of copper will follow then it is time for calls on copper futures. Otherwise, you may just want to hold to your cash for now.

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