Buying Copper Put Options to Profit from a Fall in Copper Prices

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Contents

Buying Copper Put Options to Profit from a Fall in Copper Prices

If you are bearish on copper, you can profit from a fall in copper price by buying (going long) copper put options.

Example: Long Copper Put Option

You observed that the near-month NYMEX Copper futures contract is trading at the price of USD 1.4750 per pound. A NYMEX Copper put option with the same expiration month and a nearby strike price of USD 1.5000 is being priced at USD 0.1000/lb. Since each underlying NYMEX Copper futures contract represents 25,000 pounds of copper, the premium you need to pay to own the put option is USD 2,500.

Assuming that by option expiration day, the price of the underlying copper futures has fallen by 15% and is now trading at USD 1.2540 per pound. At this price, your put option is now in the money.

Gain from Put Option Exercise

By exercising your put option now, you get to assume a short position in the underlying copper futures at the strike price of USD 1.5000. In other words, it also means that you get to sell 25,000 pounds of copper at USD 1.5000/lb on delivery day.

To take profit, you enter an offsetting long futures position in one contract of the underlying copper futures at the market price of USD 1.2538 per pound, resulting in a gain of USD 0.2460/lb. Since each NYMEX Copper put option covers 25,000 pounds of copper, gain from the long put position is USD 6,150. Deducting the initial premium of USD 2,500 you paid to purchase the put option, your net profit from the long put strategy will come to USD 3,650.

Long Copper Put Option Strategy
Gain from Option Exercise = (Option Strike Price – Market Price of Underlying Futures) x Contract Size
= (USD 1.5000/lb – USD 1.2540/lb) x 25000 lb
= USD 6,150
Investment = Initial Premium Paid
= USD 2,500
Net Profit = Gain from Option Exercise – Investment
= USD 6,150 – USD 2,500
= USD 3,650
Return on Investment = 146%

Sell-to-Close Put Option

In practice, there is often no need to exercise the put option to realise the profit. You can close out the position by selling the put option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the copper option sale will be equal to it’s intrinsic value.

Learn More About Copper Futures & Options Trading

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Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

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Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Buying Copper Call Options to Profit from a Rise in Copper Prices

If you are bullish on copper, you can profit from a rise in copper price by buying (going long) copper call options.

Example: Long Copper Call Option

You observed that the near-month NYMEX Copper futures contract is trading at the price of USD 1.4750 per pound. A NYMEX Copper call option with the same expiration month and a nearby strike price of USD 1.5000 is being priced at USD 0.1000/lb. Since each underlying NYMEX Copper futures contract represents 25000 pounds of copper, the premium you need to pay to own the call option is USD 2,500.

Assuming that by option expiration day, the price of the underlying copper futures has risen by 15% and is now trading at USD 1.6960 per pound. At this price, your call option is now in the money.

Gain from Call Option Exercise

By exercising your call option now, you get to assume a long position in the underlying copper futures at the strike price of USD 1.5000. This means that you get to buy the underlying copper at only USD 1.5000/lb on delivery day.

To take profit, you enter an offsetting short futures position in one contract of the underlying copper futures at the market price of USD 1.6963 per pound, resulting in a gain of USD 0.1960/lb. Since each NYMEX Copper call option covers 25000 pounds of copper, gain from the long call position is USD 4,900. Deducting the initial premium of USD 2,500 you paid to buy the call option, your net profit from the long call strategy will come to USD 2,400.

Long Copper Call Option Strategy
Gain from Option Exercise = (Market Price of Underlying Futures – Option Strike Price) x Contract Size
= (USD 1.6960/lb – USD 1.5000/lb) x 25000 lb
= USD 4,900
Investment = Initial Premium Paid
= USD 2,500
Net Profit = Gain from Option Exercise – Investment
= USD 4,900 – USD 2,500
= USD 2,400
Return on Investment = 96%

Sell-to-Close Call Option

In practice, there is often no need to exercise the call option to realise the profit. You can close out the position by selling the call option in the options market via a sell-to-close transaction. Proceeds from the option sale will also include any remaining time value if there is still some time left before the option expires.

In the example above, since the sale is performed on option expiration day, there is virtually no time value left. The amount you will receive from the copper option sale will be equal to it’s intrinsic value.

Learn More About Copper Futures & Options Trading

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

Selling (Going Short) Copper Futures to Profit from a Fall in Copper Prices

If you are bearish on copper, you can profit from a fall in copper price by taking up a short position in the copper futures market. You can do so by selling (shorting) one or more copper futures contracts at a futures exchange.

Example: Short Copper Futures Trade

You decide to go short one near-month LME Copper ‘A’ Grade Futures contract at the price of USD 3,171/ton. Since each Copper ‘A’ Grade futures contract represents 25 tonnes of copper, the value of the contract is USD 79,275. To enter the short futures position, you have to put up an initial margin of USD 15,000.

A week later, the price of copper falls and correspondingly, the price of LME Copper ‘A’ Grade futures drops to USD 2,854 per tonne. Each contract is now worth only USD 71,348. So by closing out your futures position now, you can exit your short position in Copper ‘A’ Grade Futures with a profit of USD 7,928.

Short Copper Futures Strategy: Sell HIGH, Buy LOW
SELL 25 tonnes of copper at USD 3,171/ton USD 79,275
BUY 25 tonnes of copper at USD 2,854/ton USD 71,348
Profit USD 7,928
Investment (Initial Margin) USD 15,000
Return on Investment 53%

Margin Requirements & Leverage

In the examples shown above, although copper prices have moved by only 10%, the ROI generated is 0%. This leverage is made possible by the relatively low margin (approximately 19%) required to control a large amount of copper represented by each contract.

Leverage is a double edged weapon. The above examples only depict positive scenarios whereby the market is favorable towards you. If the market turn against you, you will be required to top up your account to meet the margin requirements in order for your futures position to remain open.

Learn More About Copper Futures & Options Trading

You May Also Like

Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

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