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

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How to Trade Copper: Copper Trading Strategies & Tips

Copper Trading Strategy:

  • Copper is a highly tradeable commodity that has clear chart patterns.
  • Copper is priced in U.S. Dollars; so the price of the dollar affects the price of copper.
  • Trading strategies for copper include technical and fundamental analysis.
  • Copper prices tend to do well when emerging markets are growing as demand derives mostly from building and construction.

Why Trade Copper and How Does Copper Trading Work?

One advantage of copper trading is accessibility. Coppe r is traded through a variety of platforms like futures, options, and on a spread betting platform. You can also gain exposure to copper via a copper ETF (exchange traded fund) like CPER (United States Copper Index Fund) or JJCB (iPath Series B Bloomberg Copper Subindex Total Return ETN).

Copper is a soft malleable metal with properties like gold and silver . It derives most of its demand from building construction, transportation equipment and electronic products. It is a good conductor of electricity and heat and therefore has a wide range of industrial uses, which also leads it to trade in high volumes – a good thing for traders because it leads to reduced spreads and clear chart patterns.

Movements in the price of copper are heavily dependent on demand from emerging market economies like China and India. During times of economic prosperity, these nations demand large quantities of copper, which increases the metal’s price. Alternatively, during economic downturns demand for copper drops, and so does the price. Traders should be aware of this dynamic when trading copper.

Many copper traders use technical or fundamental analysis to inform their trading strategy which helps a trader forecast whether the price of copper will rise or fall. Once a trader is confident in their forecast, he/she can buy or sell copper in an attempt to profit from a movement. In this way, a trading strategy can also help a trader to manage their risk , identify buy and sell signals in the market and set reasonable take-profit and stop-loss levels with a positive risk to reward ratio .

Copper trading hours

Copper trades on the CME Globex and CME ClearPort: Sunday – Friday 6:00 p.m. – 5:00 p.m. (5:00 p.m. – 4:00 p.m. Chicago Time/CT) with a 60-minute break each day beginning at 5:00 p.m. (4:00 p.m. CT)

How to Trade Copper using Technical Analysis

Traders who use technical analysis will often have a different trading strategy based on the market condition. Market conditions refer to whether a market is trending or in consolidation. A professional trader will match his/her strategy to the current market condition.

The chart below shows copper in an uptrend on a daily chart. A trending market is defined as a market consistently reaching for new price extremes. Traders could use a copper trading strategy that incorporates the use of oscillators or trend lines to look for buy and sell signals. There are other effective indicators that traders can also use to look for buy or sell signals that include, amongst others, moving averages, slow stochastic, and the MACD (moving average convergence divergence).

A consolidating market will require a different strategy when trading copper. A consolidating market is identified as a market that is currently range-bound. In a consolidating market the trader will either look to sell copper at a previous high (resistance level) or to buy copper at a previous low (support level). The trader could then look to exit the market at the other end of the range.

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Consolidating markets will eventually break out of their range so it is important for traders to manage their risk uses stop-losses . The chart below shows copper on a four-hourly chart during consolidation and eventually breaking out to the downside (orange cross). A trader would look the buy copper when it reaches the green circles and take-profit when the price reaches the upper range (red circles) or to sell when the price reaches for the red circles of the range and look to exit the trade when the price reaches for the green circles.

Copper Trading Tips for Beginners and Advanced Copper Traders

  • Traders should first identify the current market condition and then apply the appropriate copper trading strategy.
  • Copper is priced in U.S. dollars, so traders should be aware of movements in the U.S. Dollar .
  • Demand from emerging markets could drive the price of copper in the longer run so traders must be aware of the growth prospects from emerging markets like China, India, Brazil and others.
  • Risk management plays an important role in trading copper. We recommend risking less than 5% of capital on all open trades.
  • Start ahead of the rest and read our Traits of Successful Traders guide to avoid making the number one mistake new traders make!

Resources to Help You Trade the Markets

For relevant technical and fundamental analysis see our copper market data page .

The copper price generally follows the state of the world-wide economy.

To monitor economic health, use our economic calendar to keep up to date with important market-impacting economic data.

Follow our Daily Briefings on the U.S. Dollar because the Dollar may affect the price of copper!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

The Basics Of Option Prices

Options are contracts that give option buyers the right to buy or sell a security at a predetermined price on or before a specified day. The price of an option, called the premium, is composed of a number of variables. Options traders need to be aware of these variables so they can make an informed decision about when to trade an option.

When purchasing an options contract, the biggest driver of outcomes is the underlying stock’s price movement. A call buyer needs the stock to rise, whereas a put buyer needs it to fall. But there is more to an options price than that! Let’s dig deeper into why an option costs what it does, and why the value of the option changes.

Key Takeaways

  • Options prices, known as premiums, are composed of the sum of its intrinsic and extrinsic value.
  • Intrinsic value is the amount of money received immediately if an option were exercised and the underlying disposed of at market prices—it is calculated as the current underlying price less the strike price.
  • Extrinsic value of an option is that which exceeds the option’s premium above its intrinsic value – it is composed of a probabilistic element influenced mainly by time to expiration and volatility.
  • In-the-money options have both intrinsic and extrinsic value elements, while out-of-the-money options only have extrinsic value.

Intrinsic Value

The option’s premium is made up of two parts: intrinsic value and extrinsic value (sometimes known as the option’s time value).

Intrinsic value is how much of the premium is made up of the price difference between the current stock price and the strike price. For instance, assume you own a call option on a stock that is currently trading at $49 per share. The strike price of the option is $45, and the option premium is $5. Because the stock is currently $4 more than the strike’s price, then $4 of the $5 premium is comprised of intrinsic value, which means that the remaining dollar has to be made up of extrinsic value.

We can also figure out how much we need the stock to move in order to profit by adding the price of the premium to the strike price: $5 + $45 = $50. Our break-even point is $50, which means the stock must move above $50 before we can profit (not including commissions).

Options with intrinsic value are said to be in the money (ITM), and options with only extrinsic value are said to be out of the money (OTM).

Options with more extrinsic value are less sensitive to the stock’s price movement while options with a lot of intrinsic value are more in sync with the stock price. An option’s sensitivity to the underlying stock’s movement is called delta. A delta of 1.0 tells investors that the option will likely move dollar for dollar with the stock, whereas a delta of 0.6 means the option will move approximately 60 cents for every dollar the stock moves.

The delta for puts is represented as a negative number, which demonstrates the inverse relationship of the put compared to the stock movement. A put with a delta of -0.4 should raise 40 cents in value if the stock drops $1.

Extrinsic Value

Extrinsic value is often referred to as time value, but that is only partially correct. It is also composed of implied volatility that fluctuates as demand for options fluctuates. There are also influences from interest rates and stock dividends.

Time value is the portion of the premium above the intrinsic value that an option buyer pays for the privilege of owning the contract for a certain period. Over time, the time value gets smaller as the option expiration date gets closer—the further out the expiry date, the more time premium an option buyer will pay for. The closer to expiration a contract becomes, the faster the time value melts.

Time value is measured by the Greek letter theta. Option buyers need to have particularly efficient market timing because theta eats away at the premium. A common mistake option investors make is allowing a profitable trade to sit long enough that theta reduces the profits substantially.

For example, a trader may buy an option at $1, and see it increase to $5. Of the $5 premium, only $4 is intrinsic value. If the stock price doesn’t move any further, the premium of the option will slowly degrade to $4 at expiry. A clear exit strategy should be set before buying an option.

Implied volatility, also known as vega, can inflate the option premium if traders expect volatility. High volatility increases the chance of a stock moving past the strike price, so option traders will demand a higher price for the options they are selling.

This is why well-known events like earnings are often less profitable for option buyers than originally anticipated. While a big move in the stock may occur, option prices are usually quite high before such events which offsets the potential gains.

On the flip side, when a stock is very calm, option prices tend to fall, making them relatively cheap to buy. Although, unless volatility expands again, the option will stay cheap, leaving little room for profit.

The Bottom Line

Options can be useful to hedge your risk or speculate, since they give you the right, not obligation, to buy/sell a security at a predetermined price. The option premium is determined by intrinsic and extrinsic value. Intrinsic value is the moneyness of the option, while extrinsic value has more components. Before taking an options trade, consider the variables in play, have a plan for entry and have a plan for exiting. (For related reading, see “Understanding How Dividends Affect Option Prices”)

Buying Call Options: The Benefits & Downsides Of This Bullish Trading Strategy

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Last Updated on June 24, 2020

Buying call options is a bullish strategy using leverage and is a risk-defined alternative to buying stock. Foregoing the abstract “call options give the buyer the right but not the obligation to call away stock”, a practical illustration will be given:

  1. A trader is very bullish on a particular stock trading at $50.
  2. The trader is either risk-averse, wanting to know before hand their maximum loss or wants greater leverage than simply owning stock.
  3. The trader expects the stock to move above $53.10 in the next 30 days.

Given those expectations, the trader selects the $52.50 call option strike price which is trading for $0.60. For this example, the trader will buy only 1 option contract (Note: 1 contract is for 100 shares) so the total cost will be $60 ($0.60 x 100 shares/contract). The graph below of this hypothetical stock is given below:

There are numerous reasons to be bullish: the price chart shows very bullish action (stock is moving upwards); the trader might have used other indicators like MACD (see: MACD), Stochastics (see: Stochastics) or any other technical or fundamental reason for being bullish on the stock.

Options Offer Defined Risk

When a call option is purchased, the trader instantly knows the maximum amount of money they can possibly lose. The max loss is always the premium paid to own the option contract; in this example, $60. Whether the stock falls to $5 or $50 a share, the call option holder will only lose the amount they paid for the option. This is the risk-defined benefit often discussed about as a reason to trade options.

Options offer Leverage

The other benefit is leverage. When a stock price is above its breakeven point (in this example, $53.10) the option contract at expiration acts exactly like stock. To illustrate, if a 100 shares of stock moves $1, then the trader would profit $100 ($1 x $100). Likewise, above $53.10, the options breakeven point, if the stock moved $1, then the option contract would move $1, thus making $100 ($1 x $100) as well. Remember, to buy the stock, the trader would have had to put up $5,000 ($50/share x 100 shares). The trader in this example, only paid $60 for the call option.

Options require Timing

The important part about selecting an option and option strike price, is the trader’s exact expectations for the future. If the trader expects the stock to move higher, but only $1 higher, then buying the $52.50 strike price would be foolish. This is because at expiration, if the stock price is anywhere below $52.50, whether it be $20 or $52.49, the call option will expire worthless. If a trader was correct on their prediction that the stock would move higher by $1, they would still have lost.

Likewise, if the stock moved to $53 the day after the call option expired, the trader still would have lost all their premium paid for the option. Simply stated, when buying options, you need to predict the correct direction of stock movement, the size of the stock movement, and the time period the stock movement will occur; this is more complicated then stock buying, when all a person is doing is predicting the correct direction of a stock move.

Call Options Profit, Loss, Breakeven

The following is the profit/loss graph at expiration for the call option in the example given on the previous page.

Break-even

The breakeven point is quite easy to calculate for a call option:

  • Breakeven Stock Price = Call Option Strike Price + Premium Paid

To illustrate, the trader purchased the $52.50 strike price call option for $0.60. Therefore, $52.50 + $0.60 = $53.10. The trader will breakeven, excluding commissions/slippage, if the stock reaches $53.10 by expiration.

Profit

To calculate profits or losses on a call option use the following simple formula:

  • Call Option Profit/Loss = Stock Price at Expiration – Breakeven Point

For every dollar the stock price rises once the $53.10 breakeven barrier has been surpassed, there is a dollar for dollar profit for the options contract. So if the stock gains $5.00 to $55.00 by expiration, the owner of the the call option would make $1.90 per share ($55.00 stock price – $53.10 breakeven stock price). So total, the trader would have made $190 ($1.90 x 100 shares/contract).

Partial Loss

If the stock price increased by $2.75 to close at $52.75 by expiration, the option trader would lose money. For this example, the trader would have lost $0.35 per contract ($52.75 stock price – $53.10 breakeven stock price). Therefore, the hypothetical trader would have lost $35 (-$0.35 x 100 shares/contract).

To summarize, in this partial loss example, the option trader bought a call option because they thought that the stock was going to rise. The trader was right, the stock did rise by $2.75, however, the trader was not right enough. The stock needed to move higher by at least $3.10 to $53.10 to breakeven or make money.

Complete Loss

If the stock did not move higher than the strike price of the option contract by expiration, the option trader would lose their entire premium paid $0.60. Likewise, if the stock moved down, irrelavent by how much it moved downward, then the option trader would still lose the $0.60 paid for the option. In either of those two circumstances, the trader would have lost $60 (-$0.60 x 100 shares/contract).

Again, this is where the limited risk part of option buying comes in: the stock could have dropped 20 points, but the option contract owner would still only lose their premium paid, in this case $0.60.

Buying call options has many positive benefits like defined-risk and leverage, but like everything else, it has its downside, which is explored on the next page.

Downside of Buying Call Options

Take another look at the call option profit/loss graph. This time, think about how far away from the current stock price of $50, the breakeven price of $53.10 is.

Call Options need Big Moves to be Profitable

Putting percentages to the breakeven number, breakeven is a 6.2% move higher in only 30 days. That sized movement is possible, but highly unlikely in only 30 days. Plus, the stock has to move more than that 6.2% to even start to make a cent of profit, profit being the whole purpose of entering into a trade. To begin with, a comparison of buying 100 shares outright and buying 1 call option contract ($52.50 strike price) will be given:

  • 100 shares: $50 x 100 shares = $5,000
  • 1 call option: $0.60 x 100 shares/contract = $60; keeps the rest ($4,940) in savings.

If the stock moves 2% in the next 30 days, the shareholder makes $100; the call option holder loses $60:

  • Shareholder: Gains $100 or 2%
  • Option Holder: Loses $60 or 1.2% of total capital

If the stock moves 5% in the following 30 days:

  • Shareholder: Gains $250 or 5%
  • Option Holder: Loses $60 or 1.2%

If the stock moves 8% over the next 30 days, the option holder finally begins to make money:

  • Shareholder: Gains $400 or 8%
  • Option Holder: Gains $90 or 1.8%

It’s fair to say, that buying these out-of-the money (OTM) call options and hoping for a larger than 6.2% move higher in the stock is going to result in numerous times when the trader’s call options will expire worthless. However, the benefit of buying call options to preserve capital does have merit.

Capital Preservation

Substantial losses can be incredibly devastating. For an extreme example, a 50% loss means a trader has to make 100% profit on their next trade in order to breakeven. Buying call options and continuing the prior examples, a trader is only risking a small 1.2% of capital for each trade. This prevents the trader from incurring a single substantial loss, which is a real reality when stock trading. For example, a simple small loss of 5% is easier to take for an option call holder than a shareholder:

  • Shareholder: Loses $250 or 5%
  • Option Holder: Loses $60 or 1.2%

For a catastrophic 20% loss things get much worse for the stockholder:

  • Shareholder: Loses $1,000 or 20%
  • Option Holder: Loses $60 or 1.2%

In the case of the 20% loss, the option holder can strike out for over 16 months and still not lose as much as the stockholder. Moreover, the stockholder now has to make over 25% on their stock purchases to bring their capital back to their previous $5,000 level.

Moral of the story

Options are tools offering the benefits of leverage and defined risk. But like all tools, they are best used in specialized circumstances. Options have many variables. In summary, the three most important variables are:

  1. The direction the underlying stock will move.
  2. How much the stock will move.
  3. The time frame the stock will make its move.
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