Advantages of Copper Option Buyers in the "Critical Week" Market

The Norm of Copper Price Fluctuations: Tug-of-War Between Bulls and Bears and Rangebound Consolidation

Historical data shows that in the weekly candlestick fluctuations of copper prices, approximately 80% of trading weeks exhibit characteristics of rangebound fluctuations. Taking January 2023 to January 2024 as an example, when SHFE copper prices fluctuated within the range of 65,000 to 70,000 yuan/mt, the weekly volatility was generally below 3%, and the volatility for two consecutive weeks was generally below 5%. Trading volume and open interest also did not show significant changes. This phenomenon stems from the dynamic equilibrium between bullish and bearish forces.

First, the equilibrium game of fundamentals. As an "economic barometer" for industrial metals, copper's demand side is driven by long-term variables such as global manufacturing PMI and new energy investments, while the supply side is influenced by lagging factors such as mine production cycles and geopolitics, generally forming an overall equilibrium state.

Second, the convergence of capital behavior. During periods lacking clear directional signals, institutional investors tend to adopt mean-reversion strategies, compressing the fluctuation space through buying high and selling low. Retail traders, due to information asymmetry, frequently enter and exit the market, further exacerbating the back-and-forth fluctuations.

Against this backdrop, traditional futures traders who engage in frequent trading may see their profits eroded by transaction costs (commissions, slippage), and may even fall into the dilemma of "high win rate but low profit-to-loss ratio."

Characteristics and Driving Logic of "Critical Week" Market Movements

Unlike the norm, approximately 20% of "critical weeks" often exhibit breakthrough price fluctuations. For instance, from May 2021 to June 2022, after a year of high-level rangebound consolidation, copper prices plummeted from 72,500 yuan/mt to 53,300 yuan/mt within the subsequent five weeks, a drop of 26%, completing a significant shift in the price range. From January 2023 to February 2024, SHFE copper prices consolidated repeatedly within the framework of 65,000 to 70,000 yuan/mt, and then rapidly surged by 27% over the next nearly 10 weeks, with the market building up momentum to reach a record high. Entering 2025, CME copper prices broke out upwards in February, fluctuating by 10% over two weeks; in April, due to global tariff disputes, copper prices fell by over 20% over two weeks.

Such "critical week" market movements share commonalities. First, the Davis Double Play effect. In the futures market, during upward breakouts, price breakouts trigger a resonance between short-covering and bulls rushing to buy amid continuous price rise, forming a positive feedback loop. Conversely, during downward breakouts, bulls triggering stop-losses and bears actively selling create a resonance. After the equilibrium between bullish and bearish forces, which dominate most trading weeks, is broken, a few trading weeks quickly complete the price fluctuations. Second, a sharp increase in volatility. During "critical weeks" of price fluctuations, historical volatility (HV) often jumps from the norm of 15% to 20% to over 40%, and implied volatility (IV) of options also surges simultaneously, creating a cost-effective profit space for buyer strategies.

Advantages of Option Buyers: Nonlinear Returns from Volatility and Direction

Compared to futures, option buyers can profit from both "direction and volatility" during "critical weeks" in the market.

First, leverage effect and risk controllability. In early March 2024, the premium cost for buying at-the-money or three-strike out-of-the-money call options on SHFE copper was 10% to 15% of the underlying value. However, in the subsequent "critical weeks," SHFE copper prices rose by 10%, and the value of several highly liquid call options increased by 500% to 1,000%. Meanwhile, since the maximum loss for option buyers is limited to the premium paid, traders holding positions, while anticipating significant volatility profits, also avoided the risk of margin calls associated with futures positions.

Second, capturing volatility premiums. During "critical weeks," due to sharp fluctuations in market prices, the implied volatility (IV) of options is also overestimated amidst panic or euphoric market sentiment. Even if there is a slight deviation in directional judgment, the rise in IV can provide a margin of safety for buyers through the sensitivity of option prices to volatility (VEGA). The logical basis is that "critical weeks" typically unfold in three patterns: first, a breakout price range shift after a prolonged consolidation; second, a resumption of price development after a brief consolidation within a relatively stable trend; third, signs of a reversal at the end of a long-term trend, such as an initial rebound after a decline or a pullback after a surge. Regardless of the price fluctuation pattern, once investors detect a potential rise in market volatility through analysis and deduction, they can correspondingly engage in protective operations or speculative interventions as option buyers, with significant potential return-to-risk ratios.

Strategy Derivation and Risk Management for "Critical Weeks"

Based on the leverage characteristic of option buyers, where "losses are limited and profits are unlimited," two types of trading logic can be further extended.

First, strategy supplementation under vague predictions. When traders lack confidence in direction but anticipate a rise in volatility, they can construct a long straddle. For example, by simultaneously buying call and put options with the same strike price, if prices break out in either direction during "critical weeks," profits can be realized through volatility expansion. For instance, on April 3, 2025, on the eve of the Tomb-Sweeping Day holiday, SHFE copper prices were in a weekly uptrend but showed a pattern of jumping initially and then pulling back on a daily basis. Given that international tariffs were at a disclosure node, there was a significant probability of sensitive and uncertain market reversals. Assuming an investor observed the copper 2506 contract and simultaneously bought an at-the-money call (cu2506-C-78000) and put (cu2506-P-78000), on the first trading day after the holiday, priced at the peak of volatility, cu2506-C-78000 fell from 1,926 yuan at the pre-holiday close to 410 yuan, resulting in a 78.7% loss for the investor. Meanwhile, cu2506-P-78000 rose from 1,112 yuan at the pre-holiday close to 6,914 yuan, yielding a 580% gain for the investor. The two trades collectively demonstrated significant strategic gains amidst major uncertainties in the market.

Second, risk warnings for sellers. Option sellers may face "tail risks" during the "critical week". Due to the asymmetric structure of "limited gains and unlimited risks" for option sellers, they need to be highly vigilant against cliff-like losses during the "critical week" of market volatility in normal trading. Sellers should use methods such as volatility surface analysis and stress testing to predict the probability of the "critical week" occurring and strictly control their positions.

Conclusion and Implications

In copper price trading, the "critical week" accounts for a limited time period but is a core window determining account profitability: the "critical week" determines key profits. Option buyers, with their nonlinear return characteristics, become effective tools for capturing such market movements. For traders, it is necessary to establish capabilities at two levels: first, a "critical week" identification system that combines signals such as macroeconomic events, changes in open interest structure, and technical pattern breakouts to improve the ability to predict the "critical week"; second, flexibility in option strategies, dynamically adjusting the position ratio between buyers and sellers according to market conditions, controlling losses in normal market conditions, and concentrating efforts to capture excess returns during the "critical week".

In the future, as the financial attributes and volatility of copper further increase, the application of option tools in the "critical week" market will become more refined, and traders' core competitiveness will also shift towards a composite dimension of "timing ability × tool adaptability".

(Source: Futures Daily)