NEW YORK: Copper option volatility jumped on Monday with heavy volume in put option trades as low as $5,000 per tonne, as investors scrambled to protect their positions against a deeper rout after prices hit fresh 5-1/2-year lows.
The activity came as prices for three-month copper on the London Metal Exchange sank as low as $5,339.50 a tonne, its weakest since July 2009, before paring losses to end the day at $5,580, up 1.27 percent.
Traders said the activity reflected increased caution as visible inventories increase and concerns rise about demand from China, the world's top consumer, while traders worry about euro zone instability after the leftist Syriza party's weekend victory in Greece's election.
"We're readying for another attack to the downside," said a US market source. "Maybe the market's now gunning for $5,000." LME stocks have risen almost 50,000 tonnes since Jan. 6, hitting 236,850 tonnes on Monday, their highest since April.
The heaviest options volume - almost 2,000 lots equivalent to 50,000 tonnes - was in puts that allow the holder to sell at $5,000 per tonne if prices drop below those levels, according to data from the London Metal Exchange.
Piercing that level would be particularly acute for a big portion of the world's producers, raising the likelihood of smelter cutbacks.
Some 1,120 contracts expiring in March and another 800 for June changed hands on Monday. That activity was significantly higher than the other active options contracts on Monday: 100 puts with a $6,000 strike price and 250 puts for $5,500, both expiring in June.
Implied volatility in the March puts rose to 32.81 from 31.14 on Friday, while June implied volatility rose to 31.37 from 29.15, signaling higher activity as the market got closer to being in the money.
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