Copper Traders Place Huge Way-Out-Of-The-Money Calls That Price Will Rise 50% in 2018

Traders have spent about $4.5 million on call options wagering on copper climbing above $10,000 a metric ton by December 2018. That would be a rally of 46%. But to make a profit, held to completion, the price needs to rise even more.

Please consider High-Flying Bets on Copper.

The frenzy in the copper market is luring traders to take high-flying bets that prices are headed back toward a record.

Call options wagering on copper climbing above $10,000 a metric ton by December 2018 have started trading during the past two weeks, London Metal Exchange data show. In total, traders have spent about $4.5 million on the contracts.

Copper hasn’t traded at those levels since 2011, the peak of a commodities boom mainly fueled by a roaring economy in China, the biggest user. The bulk of the wagers came last week during the mining industry’s annual gathering in London and suggests traders are becoming increasingly bullish on demand driven by electric cars.

“It’s like a lottery ticket,” said Leon Westgate, a senior analyst for base metals and bulks at Levmet U.K. Ltd., said by phone on Tuesday. But “I can understand the rationale, because you can make a pretty strong argument for much higher prices.”

Chilean miner Codelco said prices could test record highs above $10,000 a ton as the supply-demand balance shifts to “substantial” deficits from 2018. Goldman Sachs Group Inc. also predicts the metal will continue to benefit from synchronized global growth.

Copper is up 24 percent this year at $6,866 a ton on the LME, and last month reached a three-year high.

The traders will be rewarded handsomely if the options expire in the money. They bought $2.5 million of options on Thursday that would pay out about $10 million if copper reaches $10,200 by December next year, data compiled by Bloomberg show. The options would be worth $28.8 million if copper hits $10,500.

What If?

If copper closes at $10,000 or less, the traders will suffer a 100% loss.

I am bullish on electric cars but not by 2018. Add another four years. In the interim, a recession could easily smash copper prices.

Mike "Mish" Shedlock

Jeez. The Enter key posts! Bang. Just like that.

Worse. Appends.

Looks to me like they bet on 2,823 metric tons ($28.8 MM divided by $10,200). Could this be ETN(s) buying the long contract with the underwriting bank(s) hedging the risk using a spread and the underwriters expecting to pocket the difference when the contract is rolled (closed) before expiration? That’s my wild guess. Hard to believe that any individual would purchase a $2.5 MM lottery ticket.

If someone knows better, please explain.

I see I used the wrong numbers when I did my initial comment, whoops.

$10 MM gain at $200 over contract = 50,000 metric tons.

I cannot make that match up with the $28.8MM at $500 over contract (which would be 57,600 MT?)

I must be missing something. Anyhow, I think there should be roughly 50,000 metric tons of copper underlying. Still doubt an individual is buying those options.

Discussing the open interest of a strike as an individual trade, or discussing any options trade without knowing what/if was done against it, is just silly.

is the assumption that these calls were bought not sold?

Then again, in general, anyone trying to discuss options just makes themselves sound silly, they just don't know it. i.e., writing about a "bullish" trade that trades 2.6 million contracts and not seeing it was actually a very bearish vol trade.

Ambrose, If someone bought em, someone had to write 'em. But it ain't really that big, and it is VERY unlikely they were bought by someone who thinks the price is going over $10,000.

wrldtst, that's the sort of math I got to. $60+ per metric ton. Then http://www.cmegroup.com/trading/metals/base/copper.html?pagenumber=121&sortfield=name and got confused by $3 prices. Apparently, that's a penny a pound, though, so roughly 22.04 * $3+. So. OK. The headline is overwrought, it would seem. Someone wanted insurance their copper supply wouldn't break their bank a year from now. Is 60K metric tons of copper a lot? Or a drop in the bucket?

copper Futures

Read a story the other day, that Rio Tinto is proposing to build a copper mine that would extend down some 7,000 feet in Arizona, where the ambient temperature is 175 degrees. The gist being that it is going to become more difficult, expensive and energy intensive, to obtain copper deposits.

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