Copper futures (/HG) are down a whopping 55% from their 2011 highs, the Chinese market was down more than 10% in 4 days and US markets took a 5% hit during those 4 same days but what we want to know is if we can make some money from these related markets. We're here to help you see things in a new light and to offer you a trade idea you might try.
A table of the High Grade Copper Futures contract (/HG) was displayed. The table included the current price, units per contract, notional value, minimum tick size and dollars per tick.
Copper futures are the most actively traded industrial commodity. Copper prices are considered by many to be a leading economic indicator. Copper prices are linked to economic activity but despite the steady (yet modest) increases in GDP over the last several years copper prices have fallen 55% since the highs seen in 2011 (while the S&P 500 has rallied 58%). This was displayed graphically. Copper in the past three years on a 24 month rolling basis, has had a strong 70% correlation to the E-minis (/ES) but as of late that correlation has fallen to 15%.
A graph of the difference between the annual return of the S&P 500 and the Shanghai Stock exchange over the last four years was displayed. Another graph comparing the fall from their highs was also displayed. The S&P 500 is down 5.5% from its highs while the Shanghai Exchange is down 36%.
Pete explained some of the fundamentals of the copper trade, how Chinese use of it was very important and also how it had been used as collateral in deals. He further explained how interests rate moves have affected this. He then explained the rationale for his trade idea which includes a Theta component..
Pete’s possible trade idea between a long /HG and a short /ES call was outlined. The trade included buy/sell, the contract, current price, total notional value, initial margin/contract and total margin required. The “protection” the short call provides was noted.
Watch this segment of “Closing the Gap-Futures Edition” with Pete Mulmat and Tony Battista to learn all about the relationships between Copper, China and the US and for a pairs trade.
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