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Aluminum traders are making bold bets in the options market to position for price spikes later this year, as the metals world weighs the possibility of restrictions on Russian supplies.
The London Metal Exchange is holding formal discussions about banning Russian metal, while the US government is considering a range of potential curbs on aluminum specifically, including possible sanctions on mining giant United Co. Rusal International PJSC. The debate has divided the aluminum market: some consumers are emphatically shunning Russian production, while others depend on it.
Since Bloomberg first reported the LME’s plans in late September, the spread between the implied volatility of front-month aluminum puts and calls has surged — meaning that traders are paying more to get hold of calls that will pay off if prices spike.
At the end of the last month, the spread between near-the-money calls and puts — known as a risk reversal — showed that the market was valuing puts more highly, as a deteriorating macroeconomic outlook weighed heavily on prices.
Now, the preference for calls has reached levels seen only twice in recent history: In 2018, when sanctions on Rusal sent prices soaring, and in March, as Russia invaded Ukraine.
“There is certainly significant agitation among people looking to get their hands on topside calls,” Keith Wildie, head of trading at Romco Group, said by phone. “Implicitly, this is a reflection of the market’s concern with respect to sanctions on Russian materials, either by the LME or the White House.”
The risk for buyers of the calls this time around is if the LME and the White House decide against any restrictions. A global survey of traders by Bloomberg showed the debate is polarizing the metals world, with some manufacturers refusing to take Russian aluminum on ethical grounds, while buyers in some industries can hardly escape using it.
With calls now so richly priced and resistance to the proposals growing, some options traders may start to take the other side of the trade, Wildie suggested.
“Given this market dynamic, if one believes that these scenarios won’t occur, then aluminum calls present significant opportunity from the short side,” he said.
(By Mark Burton, with assistance from Alex Longley)
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