Example: Long Aluminum Call Option
The reason is simple and goes right back to the very basis of cash-and-carry arbitrage. If you can take option aluminum physical commodity, place it in storage and hedge it with a short futures position at a price sufficient to cover all of the physical and financial costs of storage, the worst that can happen to you is you will make a profit equivalent to the amount at which you sold the futures contract option aluminum full carrying option aluminum.
You can determine this return in advance by calculating the convenience yield implied in the forward curve of a futures market. This payment often is referred to as the convenience yield of a market, described below in equation form where Month 1 and Month 2 are the first and second futures contracts.
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EQUATION 1 A market in backwardation, also known as an inverse depending on the industry, always has a positive convenience yield; a market in a true contango has a option aluminum convenience yield; and a market at full carry has a convenience yield of zero. We should expect inventories option aluminum decline in backwardated markets and to rise in contango markets because storage is unprofitable in the former and profitable in the latter.
If the worst that can happen to you in a storage situation is a return equivalent to the convenience yield, the best is an opportunity to deliver the commodity in storage to a buyer at a premium to the futures price prevailing at the time of sale. As the commodity was placed in storage at a discount to the futures contract, a sale at a price greater than the futures can represent a gain, one whose bounds are defined by an anxious buyer of the spot commodity who option aluminum need it to prevent a shutdown of a processing unit.
Aluminum Option Exchanges
This was to be expected as markets abhor free arbitrage opportunities. However, the spot price gains required for the trade to break even are quite low and might invite a speculative trader to take the gamble on a spot market premium for aluminum materializing.
That boom took a hiatus during the financial crisis and then resumed in early as China began a short-lived strategic stockpiling campaign for copper, aluminum and other industrial materials. Chinese imports of aluminum rose from an average of 77, metric tons per month in the second quarter of tometric tons per month in the second quarter of and option aluminum retreated to 87, metric tons per month in the second quarter of Monthly imports in the fourth quarter of averagedmetric tons and were atmetric tons per month in January-February While the normalized backwardation between LME spot prices and three-month forwards ebbed and flowed with price, the relationship has not been a strong indicator.
Backwardation is the expected pattern in physical markets where the cheapest places of storage are with the producer rather than with the buyer. This was option aluminum case only for short-lived periods prior option aluminum the financial crisis and rarely afterward. China was stockpiling metal and driving the price higher during a period of slack demand; whether this is a good money-making strategy will be left for you to decide.
Scarcity is where you find it Just as all politics is local, so, too, are all warehouse delivery markets. Take Detroit. The city may be in a messy Chapter 9 bankruptcy, but it is still a center for automobile manufacturing and the home of three LME-certified warehouses for aluminum. This has not been the case at all.
Aluminum Options Explained | The Options & Futures Guide
Realizing the option Traders should keep in mind W. The Metals Bulletin Midwest spot and premium prices are converted from dollars per option aluminum to dollars per metric ton.
A long position in the Midwest spot can be matched against a short April futures contract. The trick to realizing this call is not delivering the aluminum in a timely fashion.
Aluminum call options are purchased by traders who are bullish about aluminum prices. Traders who believe that aluminum prices will fall can buy aluminum put options instead.
Otherwise, the premium could not materialize. Moreover, just as the mid-continent discount in crude oil led to expansion of inventories held at Cushing, Okla. The U. Social utility is such an abstract concept, is it not? The introduction of a new option aluminum futures contract by the CME Group based on the all-in option aluminum price of aluminum should end the odd cycle of rising spot market premiums in a market with excess supplies.
The repurchase price of the short futures contract in the illustration above will incorporate the increase in the Midwest premium and thus will negate the gains on the spot market side of the trade. Howard Simons is president of Rosewood Trading Inc.
Reach him at hsimons aol.