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Traders bet on higher volatility in copper amid US-China trade war

The strategy is expected to pan out towards expiry of the contract, on or before June 26.

, ET Bureau|
May 16, 2019, 08.43 AM IST
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copper-getty
If the trade war is resolved, copper would rise to say Rs 460.

Commodity Summary
MCX

COPPER
Mumbai: Traders on MCX are taking positions on base metals to benefit from expected rise in volatility amid the ongoing trade war between US and China. To play this volatility, brokers are advising their wealthy clients to sell a copper futures contract expiring on June 28 while simultaneously buying two out of the money (OTM) call options expiring on June 26.

The strategy is expected to pan out towards expiry of the contract, on or before June 26. It could be initiated around current market prices of Rs 425 -430 per kg, said Nitin Kedia, business head, Kedia Commodity.
copper-graph


Assuming Wednesday’s intraday prices, the copper futures contract can be sold at Rs 425. The applicable margin for selling one futures contract (1 tonne) is around Rs 29,000 as the margin is reduced because of the sale of two calls, which act as offsetting contracts. The intraday price of the 430 strike call was Rs 10 per kg while the 440 strike call was Rs 6 a kg intraday on Wednesday. The outflow for the purchase of the calls is Rs 16,000 (16X1000 kg) per 1MT.

Around expiry, if copper corrects to Rs 390 on exacerbation of the trade war, the futures contract fetches the trader a gain of Rs 35 a kg. The two call options are worthless at this price. Adjusting for the loss of the call options, the trader nets a gain (ex-brokerage and taxes) of Rs 19 or 19,000 at the contract level. If the trade war is resolved, copper would rise to say Rs 460. In such a scenario, the loss on the futures contract is Rs 35 a kg. However, the 430 call is in the money by Rs 30 and the 440 call is in the money by Rs 20. The trader ends up making a net gain of Rs 15,000 (50-35). Gnanasekar Thiagarajan, director, Commtrendz, said the trade war would raise “volatility” in copper with an exacerbation leading to a “correction” in copper price by or before Juneend.

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