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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