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Copper Tips |
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About Copper Futures and Options
Copper, one of the oldest
commodities known to man, is a product whose fortunes directly
reflect the state of the world's economy. It is the world's third
most widely used metal, after iron and aluminum, and is primarily
used in highly cyclical industries such as construction and
industrial machinery manufacturing. Profitable extraction of the
metal depends on cost-efficient high-volume mining techniques, and
supply is sensitive to the political situation, particularly in
those countries where copper mining is a government-controlled
enterprise.
Copper was first worked about 7,000 years ago. It's softness, color,
and presence in nature enabled it to be easily mined and fashioned
into primitive utensils, tools, and weapons. Five thousand years
ago, man learned to alloy copper with tin, producing bronze and
giving rise to a new age. Thus copper was established as a commodity
with commercial value.
In the early 20th century, new mining and smelting techniques were
developed in the United States which made it possible to process
lower-grade ores, resulting in a dramatic global expansion of the
copper market.
Exchange-Based Copper Trading
The New York Mercantile
Exchange merged with the Commodity Exchange, Inc., in August 1994 to
become the world's largest physical commodity exchange.
The COMEX Division copper
futures market stands alone in its reliable price transparency and
market safeguards that protect all participants. Trading is
conducted as an open auction, price discovery is straightforward and
exclusive of brokerage fees, price dissemination is virtually
instantaneous, and, at the end of the day, all positions are
marked-to-market and obligations settled in cash. There is no
counterparty credit risk since the Exchange and its clearinghouse,
which is composed of some of the most highly regarded firms in the
financial services industry, stands on the other side of every deal.
The Exchange also readily provides all pertinent statistical
information including trading volume, open interest, and warehouse
stocks in an accurate, reliable, and timely fashion.
The Exchange maintains absolute neutrality toward the market as its
rules apply not only to both sides of a transaction, but also to all
who trade its contracts, from the smallest individual investor to
the largest multinational corporation. The sophisticated, intricate
system of safeguards, evenly applied, gives market participants an
assurance against manipulation and default that is absent from
over-the-counter markets and many foreign exchanges.
Why Trade COMEX Division Copper Futures and Options?
Copper's importance in world
markets and responsiveness to world events make COMEX Division
high-grade copper futures and options an important risk management
tool for commercial interests as well as an exciting, potentially
rewarding opportunity for private investors who seek to profit by
correctly anticipating price changes.
Trading on the COMEX Division offers a number of advantages:
The contracts are liquid financial instruments that are standardized
by quality and quantity
The Exchange offers cost-efficient trading and risk management
opportunities.
COMEX Division copper prices are
widely and instantaneously disseminated, serving as world reference
prices.
COMEX Division markets allow hedgers and investors to trade
anonymously through futures brokers.
The depth of the market allows the contracts to be easily liquidated
prior to required receipt or delivery of the underlying commodity.
While futures contracts are seldom used for delivery, if delivery is
required, performance is guaranteed. Counterparty risk is absent
from transactions executed on the Exchange.
Contract performance in the copper futures and options contract is
supported by a strong financial system, backed by the COMEX Division
clearing members, including some of the most well-respected names in
the banking and financial services industries.
The Exchange offers safe, fair, and orderly markets protected by its
rigorous financial standards and surveillance procedures. The New
York Mercantile Exchange is a not-for-profit institution that
provides a self-regulatory infrastructure that allows market
participants to do business in a fair and orderly way.
Futures
Futures contracts are firm
commitments to make or accept delivery of a specified quantity and
quality of a commodity during a specific month in the future at a
price agreed upon at the time the commitment is made. Less than 1%
of all metals futures contracts traded each year result in delivery
of the underlying commodities. Instead, traders generally offset
their futures positions before their contracts mature. The
difference between the initial purchase or sale and the price of the
offsetting transaction represents the realized profit or loss.
Trading in COMEX Division high-grade copper futures is conducted for
delivery during the current calendar month and the next 23
consecutive months.
Options
Because of the global nature of
the metals markets, their prices can be volatile. The metals
industry and other commercial markets participants have learned to
cope with the price uncertainty by actively hedging against adverse
price movements. While futures are among the primary risk management
tools available, options on futures open a host of versatile,
economical trading strategies.
Options on futures provides:
A limit on the buyers potential loss to the premium paid for the
option.
The ability to hedge cash and futures positions against an adverse
price direction without foregoing the benefits of favorable price
movements.
The availability of hedging insurance at many different levels of
cost and degrees of protection.
A way for businesses and investors to act aggressively or
conservatively on views about the direction and volatility of copper
prices.
By using options alone, or in combination with futures contracts,
strategies can be found to cover virtually any risk profile, time
horizon, or cost consideration.
COMEX
Division options are offered for
trading in each of the following contract months: March, May, July,
September, and December up to one year to expiration. Serial months
are also listed so there are always three consecutive nearby months
traded. Twenty-four month copper options are listed when July or
December becomes the 24th month. The options are American-style and
can be exercised at any time up to expiration.
There are two types of options, calls and puts. A call gives the
holder of the option the right, but not the obligation to buy the
underlying futures contract. Conversely, a put gives the holder the
right, but not the obligation to sell the underlying futures. Puts
are usually bought when the expectation is for neutral or falling
prices; a call is usually purchased when the expectation is for
rising prices. The price at which an option is bought or sold is the
premium.
Margin Requirements
All New York Mercantile
Exchange markets, including the COMEX Division copper futures and
options markets, hold a key advantage over many other trading forums
because all open positions are marked-to-market and settled in cash
at the end of the day. This ensures that market participants do not
incur obligations beyond their ability to perform, protecting the
other participants in the market and preventing trading losses from
being shielded from company management.
Whenever a futures or short options position is initiated, the
Exchange clearinghouse collects a margin payment as a good faith
deposit, or performance bond, from the clearing member, which in
turn collects a margin payment from the customer. In order to
protect the integrity of the market, the Exchange establishes
margins at sufficient levels to adequately guard against the risks
associated with changing market conditions. The Exchange also
requires that margin payments from customers are posted with the
clearing member in either cash or U.S. government obligations with
less than 10 years to maturity and, in turn, that the clearing
member place these funds in a segregated depository.
As prices move, additional margin is collected from those
participants who have experienced an adverse movement and paid to
those with a favorable position.
Margin requirements are subject to change, please contact the
exchange or your broker for current information.(infinitytrading.com)
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