Looking at the big picture, the copper market has been a strong uptrend over the past three years. Despite extreme volatility mid-year due to tariff events, prices held above the Ichimoku Cloud support. Now, with the weekly MACD turning higher, the trend appears poised in the coming weeks and months. This technical outlook suggests medium- and long-term traders that the rally has solid grounds to continue.

Additional macro considerations are at play. The recent Section 232 proclamation on "Adjusting Imports of Copper into the United States," issued on July 30, 2025, found that copper imports threaten national security. This finding triggered a 50% tariff on most imported semi-finished and derivative copper products, effective August 1. With a further phased universal import duty on refined copper under consideration for 2027 and 2028, these measures are ultimately designed to reduce dependence on foreign sources, which will fundamentally alter the supply and demand dynamics currently underpinning the copper market.

Copper is often referred to as “Dr. Copper” because its widespread use in housing and infrastructure construction presumably gives it the ability to forecast economic growth. A comparison of the generic front-month Copper futures to the ISM Manufacturing Survey shows that the performance of Copper futures generally compares favorably to the ISM’s measure of economic growth. However, a wide, negative divergence has developed over the last year. This suggests that either copper is being overly optimistic in its growth forecast or the ISM Survey is not optimistic enough - a gap that is likely to close at some point.

Turning to the Daily Ichimoku Cloud chart, we see that the December futures have hit resistance at the top of the cloud. The lagging span (red line) also failed at the top of the cloud and is heading lower. Both of these signals point to potentially lower December futures in the coming days. Even a sideways consolidation of price would target a move to 485 from the recent 509 level. A sharper move to 460 could occur without reversing the longer-term uptrend seen on the weekly charts. As a result, traders should be aware of a possible countertrend move, especially if economic headlines suggest that U.S. growth is not as robust as the copper market currently indicates.

This potential countertrend move is further supported by current positioning. A review of the Commitment of Traders report over the last three years shows that Managed Money is at one of its longest positions, second only to Spring 2024. This excessive length, combined with the negative short-term technical action, has the potential to lead to a quick reversal of prices. As a result, traders who are currently long may want to consider hedging their position. Likewise, traders with no position should be aware that any negative economic news could lead to a reduction in this excessive length, creating the possibility for a short-term bearish trade setup.

Turning now to the volatility market, we can observe how options traders are currently pricing the market.

The top chart compares the CVOL Index to the underlying copper price. Typically, there is a positive co-movement between price and volatility, with higher copper prices leading to a higher CVOL Index and vice versa. However, a recent divergence has appeared: while prices have moved back toward the yearly highs, copper implied volatility (CVOL) has dropped to a level consistent with the three-year average. This raises the question of whether options traders see something that suggests the recent move higher in futures is unsustainable.

To explore this further, the bottom chart shows the skew ratio - the ratio of upside variance to downside variance, which measures the relative demand for upside versus downside options. Over the last three years, the skew ratio has also shown a positive co-movement with the underlying price. Once again, a divergence from recent price action is apparent: as futures prices move higher, the relative pricing of upside variance to downside variance has fallen. While upside options still hold a premium, the magnitude of that premium has dropped to only average levels for the past few years. This action suggests that traders may be starting to hedge some of the length of their positions in the options market.

Staying within the options market, we can analyze the implied volatility surface and the term structure of implied volatility to assess the relative pricing of options across and within expirations.

A look at the implied volatility surface (top chart) across different expirations and deltas clearly shows that upside call options still contain a premium to downside strikes. Furthermore, the level of implied volatility through the December expiration is lower than the level seen looking into 2026. The bottom chart, which shows the term structure of implied volatility, provides a more nuanced view by narrowing in on daily and Weekly expirations for the next 30 days. Two anomalies stand out:

Consistent discount: There is a consistent discount for Monday and Tuesday expirations compared to other days of the week. This is expected since the market is closed over the last weekend before expiration. However, given the possibility of continued trade tensions or headlines, market movement over a weekend can never be entirely ruled out.

Thanksgiving discount: Options near the U.S. Thanksgiving holiday also show a discount, as the market is closed on Thursday and often lightly staffed on the Friday after.

For options buyers, these discounts can present opportunities in expirations where demand for options is lower, and reduced market liquidity could potentially lead to larger-than-normal price moves.

This technical setup creates an interesting trade idea, which is useful for both traders looking to express a short-term countertrend view and for long-term holders seeking a short-term hedge. Given that the strategy is net long options, as indicated by positive gamma, vega and theta, it is best to select an expiration whose implied volatility is currently depressed relative to others. Furthermore, because upside options have a higher implied volatility, selling some upside options can fund the long downside puts. A move above 5.20 would technically unwind the short-term bearish signal, so a trader or hedger may want to cap their risk at this level. Using the current higher implied volatility allows a trader to cap their risk while still funding the long options. The specific strategy chosen is a long 4.95 put funded by selling a 5.10-5.20 call spread. This trade is essentially premium neutral. The maximum gain is unlimited below 4.95, with the trader participating on a one-to-one basis. The short-term chart suggests a consolidation target of 4.85 and a possibility of a larger move to 4.60. The neutral zone is between 4.95 and 5.10, where there is no risk as no premium is involved. For any move above 5.20, the loss is strictly limited to the difference between the call spread strikes, which is 0.10. The flexibility of daily options allows traders to find opportunities to express their views precisely.

Tools like CVOL and skew ratio help identify these trades, while QuikStrike tools like vol surface and term structure help narrow down the optimal place to look. These tools ultimately lead to potentially very good reward-to-risk trades for both traders and hedgers.

Good luck trading!

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