Options

The London Metal Exchange has traded options in their current form since the 1980s. Options are an extremely flexible financial tool which can be tailor-made to create or protect a market position. Because of their complexity however, to the uninitiated they can appear to be dangerous tools, and they should only be undertaken under guidance from experts.

How They Work

The purchaser (taker) of an option pays a premium, normally payable in full the next banking day, to buy (call option) or to sell (put option) at an agreed price (strike price), on a pre-set date (expiration date) for delivery / settlement (prompt date) on an amount of metal agreed at the time of trading.

The holder of an options position only risks the amount he has paid out as a premium, yet his profit potential is unlimited. The seller (grantor) of an option will receive the premium from the buyer the following day. The sellers profit potential is limited to the premium alone.

LME Options

With options traded through the London Clearing House (LCH) on the LME, the expiration date is the first Wednesday of the required month with the prompt date set at the third Wednesday of that month. This coincides with the monthly structure of the third Wednesday prompts of the underlying on the LME.

All LME options are European style. This means that they can only be declared on the expiration date, as opposed to an American style option which can be declared at any time up to and including the expiration date.