Metals and the Options Market

02/13/2019 9:00 am EST

Focus: OPTIONS

Paul Cretien

Retired Professor of Finance,

Paul Cretien breaks down the options price curve of four metal futures.

At the close of trading on Feb. 8, 2019, we looked at June and July expirations on four metal futures: Gold, silver, copper and palladium. The chart below shows clear differences among the four metals with regard to market expectations price movements.

chart

Futures on gold and palladium expire in June, while July is the expiration month for the silver and copper futures used in this analysis. Because the expirations are closely grouped, the reason for differences in the heights of the four option price curves is the market’s expectation of price volatility of the underlying metal futures given the Theta or time value.

Palladium is the winner of the market expectation competition, with a price curve significantly higher than the other three metals. Gold is in serious last place, indicating that the options market does not have high expectations for a price increase through the summer months of 2019.

Silver and copper call prices fall along almost identical curves. The options market obviously views these two metals as having the same outlook regarding future price changes. If silver and copper are in neutral territory, then palladium has a definite advantage – the reverse of gold’s disadvantage according to the options market.

While a stretch, it may indicate a positive economic outlook, as gold is seen as a defensive investment, a safe haven in times of turmoil. Copper is often viewed as the best indicator of economic growth because it is used a great deal in cars and new home construction. If the forward demand for copper is strong, it is a good economic indicator. And silver is not used more as an industrial metal than a precious metal so has many of the qualities of copper though it is still more correlated with gold.

On Feb. 8, 2019, June 2019 gold was $1,325.0 per oz.; July 2019 silver was $16.004 per oz., July 2019, high grade copper was $2.8245 per lb., and June 2019 palladium was $1,362.50 per oz.

Over the period between mid-February and summer of 2019 it will be interesting to see how well the current option price curves reflect actual changes in metal prices and metal futures. The chart showing option price curves suggests going with the flow on palladium, using extra care with gold, and trading silver and copper futures and options as it they were expected to have very similar price changes – not as exciting as palladium but better than gold.

Now we will follow the metals market to see how the chart and options market perform in forecasting price changes.

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