search.noResults

search.searching

dataCollection.invalidEmail
note.createNoteMessage

search.noResults

search.searching

orderForm.title

orderForm.productCode
orderForm.description
orderForm.quantity
orderForm.itemPrice
orderForm.price
orderForm.totalPrice
orderForm.deliveryDetails.billingAddress
orderForm.deliveryDetails.deliveryAddress
orderForm.noItems
2.2. Options: 2.2.1 Call options allow the holder to buy at the strike price for an agreed date in the future:


• If the market price is above the strike price at option expiry, the holder “exercises” the call option and buys at the strike price.


• If the market price is below the strike price at option expiry, the holder “abandons” the call option and buys at the market price.


Some consumers buy call options to hedge because they give full protection against market prices above the call strike, and full benefit of lower prices below the call strike. The holder pays an option premium for this price insurance, and the premium largely depends on the duration, strike price and market volatility.


Chart 3 shows a copper consumer buying physical copper at the (unknown) market price for June 2020 (left scale) and paying $120/Mt premium for a June 2020, $5850 Call.


The option payoff (right scale) offsets market prices above $5850, effectively capping the Net Hedge at $5970 ($5850 + $120), with full downside price participation at Market Price +$120/Mt.


Chart 3


2.2.2 Put options allow the holder to sell at the strike price for an agreed date in the future:


• If the market price is below the strike price at option expiry, the holder “exercises” the put option and sells at the strike price, which is above the market price.


• If the market price is above the strike price at option expiry, the holder “abandons” the put option and sells at the market price, which is above the strike price.


Some producers buy puts because they give full protection against market prices below the put option strike, and full benefit of higher prices above the put strike.


Chart 4 shows a copper producer selling copper at the (unknown) market price for Sept 2020 (left scale) and paying $140/Mt premium for a Sept 2020, $5500 Put Option.


The put option payoff (right scale) offsets market prices below $5500, putting a floor on the Net Hedge at $5360 ($5500 - $140), with full upside price participation at Market Price -$140/Mt.


2.2.3 Collars: Options are expensive, so many consumer hedgers will sell a put option to pay for a call (producers do the opposite). The strategy has various names: “Min-Max”, “Collar” or “Range Forward”.


Source: LME / Reuters / ADMISI Chart 4


Chart 5 shows shows a copper consumer buying copper at the (unknown) market price for June 2020 (left scale), paying $120/Mt premium for a $5850 Call and selling a $5550 Put for $120/Mt premium.


The call option payoff (right scale) effectively caps market prices above $5850; the short put option payoff prevents any benefit if market prices fall below $5550 and, between the 2 option strikes, the consumer’s hedge price is the market price.


Source: LME / Reuters / ADMISI Chart 5


SOME CONSUMERS BUY CALL OPTIONS TO HEDGE BECAUSE THEY GIVE FULL PROTECTION AGAINST MARKET PRICES ABOVE THE CALL STRIKE, AND FULL BENEFIT OF LOWER PRICES BELOW THE CALL STRIKE.


Source: LME / Reuters / ADMISI


16 | ADMISI - The Ghost In The Machine | Q1 Edition


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24