UBS recently put forward the idea of ‘selling copper’s downside risk’ as a way to generate extra returns in the current market. But what does that actually mean in plain English?
At its heart, this is about using options to make money if copper prices do not fall much from where they are now.
UBS likes this approach because, despite recent volatility, they believe any drops in copper prices are likely to be modest and short-lived, thanks to ongoing supply constraints and growing demand for copper across the global economy.
Here’s how UBS describes the backdrop: “Copper prices are up over 39% year-to-date in the US and a still-solid 11% in London (LME).”
There’s a lot of noise in the market right now, not least because the US has threatened a 50% tariff on copper imports, which has sent prices higher and caused the gap between US and London prices to widen sharply.
At the same time, disruptions at mines and smelters are limiting supply, and UBS believes the copper market will remain “modestly undersupplied over the coming quarters, which should limit how far prices can correct.”
So what’s the investment strategy?
UBS says: “We continue to believe that selling copper’s downside price risks remains an attractive investment strategy. Option volatility has risen above 20%, and macro uncertainty suggests further price volatility ahead but not significantly higher prices.
"This stands in contrast to the longer-term picture, we see higher prices in the years ahead amid structural supply challenges and a secular increase in copper use across the global economy.
"We think this makes selling volatility an appealing strategy to take on copper exposure over the next 3-6 months.”
In practical terms, ‘selling copper’s downside risk’ usually means selling put options on copper or structured products that benefit if the price does not fall sharply.
If copper holds steady or only dips a little, you pocket the option premium. Of course, if the price drops significantly, you might have to buy copper at a higher-than-market price, but UBS is saying that risk looks limited given the current tightness in supply.
It’s a way of earning a yield in a market that UBS expects to be choppy, but not crashing, over the short term.
As the bank put it: “We like to sell copper’s price downside for a yield pickup and would go long the metal on dips.”
The bottom line: This strategy could suit investors who think copper will remain in demand and who are comfortable with the risks if prices fall further than expected.
IMPORTANT: Remember, this is an explainer, not a call to action; it's an insight into the way the professionals assess at the market.