Copper Options Explained
Copper options are option contracts in which the underlying asset is a copper futures contract.
The holder of a copper option possesses the right (but not the obligation) to assume a long position (in the case of a call option) or a short position (in the case of a put option) in the underlying copper futures at the strike price.
This right will cease to exist when the option expire after market close on expiration date.
Copper Option Exchanges
Copper option contracts are available for trading at London Metal Exchange (LME) and New York Mercantile Exchange (NYMEX).
LME Copper option prices are quoted in dollars and cents per metric ton and their underlying futures are traded in lots of 25 tonnes (55116 pounds) of copper.
NYMEX Copper options are traded in contract sizes of 25000 pounds and their prices are quoted in dollars and cents per pound.
|Exchange & Product Name||Underlying Contract Size||Exercise Style||Option Price Quotes|
|LME Copper Options||25 ton|
(Full Contract Specs)
|NYMEX Copper Options||25000 lb|
(Full Contract Specs)
|American||Calls | Puts|
Call and Put Options
Options are divided into two classes - calls and puts. Copper call options are purchased by traders who are bullish about copper prices. Traders who believe that copper prices will fall can buy copper put options instead.
Buying calls or puts is not the only way to trade options. Option selling is a popular strategy used by many professional option traders. More complex option trading strategies, also known as spreads, can also be constructed by simultaneously buying and selling options.
Copper Options vs. Copper FuturesCompared to the outright purchase of the underlying copper futures, copper options offer advantages such as additional leverage as well as the ability to limit potential losses. However, they are also wasting assets that has the potential to expire worthless.
Additional LeverageCompared to taking a position on the underlying copper futures outright, the buyer of a copper option gains additional leverage since the premium payable is typically lower than the margin requirement needed to open a position in the underlying copper futures.
Limit Potential Losses
As copper options only grant the right but not the obligation to assume the underlying copper futures position, potential losses are limited to only the premium paid to purchase the option.
Using options alone, or in combination with futures, a wide range of strategies can be implemented to cater to specific risk profile, investment time horizon, cost consideration and outlook on underlying volatility.
Options have a limited lifespan and are subjected to the effects of time decay. The value of a copper option, specifically the time value, gets eroded away as time passes. However, since trading is a zero sum game, time decay can be turned into an ally if one choose to be a seller of options instead of buying them.
Learn More About Copper Futures & Options Trading
- Copper Futures Basics
- Buying Copper Futures to Profit from a Rise in Copper Prices
- Selling Copper Futures to Profit from a Fall in Copper Prices
- Copper Call Option Trading Basics
- Copper Put Option Trading Basics
- Hedging Against Rising Copper Prices with Copper Futures
- Hedging Against Falling Copper Prices with Copper Futures
How to Start Trading Copper Options
To buy or sell copper options, you need to open a trading account with a broker that handles futures options trades. Most online brokerages out there only deal with stocks and stock options. Only a few such as TD Ameritrade lets you trade futures and futures options as well. TD Ameritrade also provide a virtual trading platform where beginners can try out futures and options trading in real market conditions without using real money.