Copper could retreat to the starting point of this rally near $2.50. If it occurs sooner, this option stands to pick up quite a bit of value. If not, the loss shouldn’t break the bank, asserts Carley Garner, Senior Strategist for DeCarley Trading.
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Copper futures are trading at prices not seen since 2015, but we question whether the bulls are getting this right.
In summary, copper has benefited significantly from weakness in the US dollar and seasonal tendencies are calling for a near term top on, or around, July 31 (Monday). Thus, the copper rally could very well be overdone.
We considered various strategies to attempt to take advantage of the possible down move in copper but the reality is, this is a thinly traded market which leaves few viable “options.” The full-sized futures contract is too much risk for us to be comfortable.
The mini contract seemed like a good idea at first but a quick look at the bid/ask spread (4 to 5 cents wide) squashed that idea! And selling calls in a market with very little open interest in the options market is a terrible accident waiting to happen.
Finally, we concluded on purchasing cheap deep-out-of-the-money put options using the December expiration in hopes they will appreciate on a sharp sell-off. Specifically, we like the idea of buying the December $2.50 puts for roughly $200 each.
The premium paid for the option plus transaction costs represents the maximum loss potential on the trade. In short, we are going in with very little risk.
To be fair, we are also going into the trade with less than stellar odds of success if held to expiration but we believe that sometime between now and then the option has a good chance at appreciating.
We can see copper retreating back to the starting point of this rally near $2.50. If it occurs sooner rather than later, this option stands to pick up quite a bit of value. If not, the loss shouldn’t break the bank. This trade gives traders 123 days in the market with very little skin in the game but unlimited profit potential.
Keep in mind, these options are relatively illiquid. You don't want to bet big here. If we are too right, there is a chance of substantial slippage on the fill price on the way out due to a lack of market participants.
If you are interested in a more in-depth discussion, you will find it here:
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