A port worker checks a shipment of copper in Valparaiso port, Chile.Eliseo Fernandez/Reuters
The frenzy in the copper market is luring traders to take high-flying bets that prices are headed back toward a record.
Call options wagering on copper climbing above $10,000 (U.S.) a tonne by December, 2018, have started trading during the past two weeks, London Metal Exchange (LME) data show. In total, traders have spent about $4.5-million on the contracts.
Copper hasn't traded at those levels since 2011, the peak of a commodities boom mainly fuelled by a roaring economy in China, the biggest user. The bulk of the wagers came last week during the mining industry's annual gathering in London and suggests traders are becoming increasingly bullish on demand driven by electric cars.
"It's like a lottery ticket," said Leon Westgate, a senior analyst for base metals and bulks at Levmet (UK) Ltd., said by phone on Tuesday. But "I can understand the rationale, because you can make a pretty strong argument for much higher prices."
Chilean miner Codelco said prices could test record highs above $10,000 a tonne as the supply-demand balance shifts to "substantial" deficits from 2018. Goldman Sachs Group Inc. also predicts the metal will continue to benefit from synchronized global growth.
Copper is up 23 per cent this year at $6,820 a tonne on the LME and last month reached a three-year high.
The traders will be rewarded handsomely if the options expire in the money. They bought $2.5-million of options on Thursday that would pay out about $10-million if copper reaches $10,200 by December next year, data compiled by Bloomberg show. The options would be worth $28.8-million if copper hits $10,500.
In total, 4,740 options targeting $10,000 by the end of 2018 were sold since Oct. 23.
Even if prices don't reach the $10,000 strike price, holders of the calls could still profit if copper rallies sharply. That's because implied volatility associated with the contracts may rise, making them more valuable, Keith Wildie, head of commodity volatility at Vantage Capital Markets Ltd., said by e-mail.
"If it all goes crazy, you have a very solid position," he said.