The Hidden Cost of Volatility

Drag on copper prices may not be as simple as a one-size-fits-all solution.

That said, the time difference between London and New York City can provide insight into market dynamics.

On average, the difference in opening Comex price for December 2009 copper futures and three-month LME settlement prices ranged from minus 7.46¢ to plus 9.42¢ over a four-month period.

The Impact of Price Differences on Trading Strategies

The differences between the two exchanges can be beneficial for traders looking to use London-settled options on Comex, particularly when the opening spread is greater than zero point five percent.

For instance, if an investor uses a call option on December 2009 copper futures with a strike price of one dollar per pound and enters the market at a lower price due to the larger opening spread over LME settlement prices, they may experience gains.

Contrasting the Impact on Comex vs. LME Settlement Prices

However, when considering trading strategies that involve both London-settled options and Comex futures, it's essential to recognize how these differences in price may impact movement in the market.

For example, a trader analyzing the correlation between Comex open and LME official settlement prices found a negative relationship above, which can be seen on scatter charts demonstrating the correlation between the two.

What the Data Actually Shows

In general, larger opening spreads over LME settlement prices tend to result in more negative daily price changes in December 2009 copper futures, assuming other factors remain constant.

The upper left quadrant of the chart indicates that most price changes during trading days were positive when the opening difference was negative.

An Advantage for Comex Traders: Price Discovery on Option Trades

LME traders may gain a competitive edge by using Comex as a source of market data to price options.

This can be particularly beneficial for option traders looking to hedge their copper prices using Comex-listed options, such as calls and puts on December 2009 futures.

Critical Writing Rule: FOLLOW EXACTLY

The time differences between London and New York City are not clear-cut, with approximations of the price variations seen by traders on each exchange.

A Note About Sample Time Period

The sample period used in this analysis may be unusual, with 55% of opening price differences being either negative or greater than zero point five percent.

Portfolio/Investment Implications

For investors looking to create a portfolio that includes copper futures and options, understanding the relationship between Comex open prices and LME settlement prices can provide valuable insights into market dynamics.

A Critical Look at Risk and Opportunity

An investor should be aware of both the potential benefits and drawbacks of using London-settled options on Comex in conjunction with Comex futures.

This includes recognizing how the time difference between the two exchanges may impact trading strategies, as well as understanding any associated risks or opportunities that may arise from this hybrid approach.