Zinc options let a buyer take a view on price changes while paying a premium for a limited period. A call offers exposure to a rise; a put offers exposure to a fall. The size of the move and the premium determine whether the buyer makes money.
How zinc options work
The examples use options on zinc futures. A call gives the right to enter a long futures position at the strike price. A put gives the right to enter a short futures position at that price.
A galvaniser may use zinc calls to protect purchase costs. A mine may use puts, while retaining exposure to its processing terms and local premiums.
The cost of one option
One LME contract represents 25 tonnes. At a premium of $100 per tonne, one option costs $2,500 ($100 × 25).
Assume the futures price and strike are both $2,800 per tonne. The call and put premiums are each $100 for comparison, not current quotes. Results below are at expiration, before fees, with any futures position from exercise immediately closed at the stated price.
Buying zinc calls
Suppose you expect zinc prices to rise and buy one $2,800 call for $2,500.
If the underlying future reaches $3,100 per tonne at expiration, buying at $2,800 gives an advantage of $300 per tonne. Across 25 units, that is $7,500. After the premium, your net profit is $5,000.
At $2,800 or below, the call expires worthless and the loss is $2,500. Breakeven is $2,900 per tonne: strike plus premium. At $2,850, the call has value but still loses $1,250 after its cost.
Buying zinc puts
If you expect prices to fall instead, buying one $2,800 put costs $2,500 in this example.
At a futures price of $2,500 per tonne, selling at the strike gives an advantage of $300 per tonne. The option is worth $7,500 at expiration, leaving a $5,000 net profit after the premium.
At $2,800 or above, the put expires worthless. Breakeven is $2,700 per tonne. At $2,750, the price has fallen, but the put still loses $1,250: the move has not covered its premium.
Before expiration
An option can be sold to close before expiration when a market is available. Its price then includes the effect of remaining time and implied volatility, so an earlier trade need not break even at the expiration price calculated above.
The purchased option can lose its whole premium. Exercise can create a futures position requiring margin and exposing you to further gains or losses. An uncovered seller can lose more than the premium received.
Zinc price chart
LME zinc futures. A continuous futures chart joins contract months; it is not an individual expiry. Check the displayed quotation and timestamp.
This market is not available in the embedded chart. Open the Zinc chart on TradingView.
