Aluminum Futures Trading Basics

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Contents

Aluminum Futures Trading Basics

Aluminum futures are standardized, exchange-traded contracts in which the contract buyer agrees to take delivery, from the seller, a specific quantity of aluminum (eg. 25 tonnes) at a predetermined price on a future delivery date.

Aluminum Futures Exchanges

You can trade Aluminum futures at London Metal Exchange (LME), New York Mercantile Exchange (NYMEX) and Tokyo Commodity Exchange (TOCOM).

LME Aluminum futures prices are quoted in dollars and cents per metric ton and are traded in lot sizes of 25 tonnes (55116 pounds).

NYMEX Aluminum futures are traded in units of 44000 pounds (19.96 metric tons) and contract prices are quoted in dollars and cents per pound.

TOCOM Aluminum futures prices are quoted in yen per kg and are traded in lot sizes of 5000 kilograms (5 metric tons).

Exchange & Product Name Symbol Contract Size Initial Margin
LME Aluminum Futures
(Price Quotes)
AH 25 tonnes
(Full Contract Spec)
USD 4,375 (approx. 12%)
(Latest Margin Info)
NYMEX Aluminum Futures
(Price Quotes)
AL 44000 pounds
(Full Contract Spec)
USD 3,038 (approx. 10%)
(Latest Margin Info)
TOCOM Aluminum Futures
(Price Quotes)
5000 kilograms
(Full Contract Spec)
JPY 75,000 (approx. 11%)
(Latest Margin Info)

Aluminum Futures Trading Basics

Consumers and producers of aluminum can manage aluminum price risk by purchasing and selling aluminum futures. Aluminum producers can employ a short hedge to lock in a selling price for the aluminum they produce while businesses that require aluminum can utilize a long hedge to secure a purchase price for the commodity they need.

Aluminum futures are also traded by speculators who assume the price risk that hedgers try to avoid in return for a chance to profit from favorable aluminum price movement. Speculators buy aluminum futures when they believe that aluminum prices will go up. Conversely, they will sell aluminum futures when they think that aluminum prices will fall.

Learn More About Aluminum Futures & Options Trading

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Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

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As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

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Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

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Aluminum: The Commodity.com Guide

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Last Updated on July 29, 2020

Who Discovered Aluminum?

Aluminum is the most common element contained in the Earth’s crust, but it is never found naturally in its metallic form. Rather, aluminum is a compound of other elements.

In the early 19th century, Danish-chemist Hans Christian Oersted first extracted tiny amounts of the metal from ore. The complexity of this process led many to believe that aluminum was rarer than gold.

In the late 19th century, however, scientific breakthroughs led to very efficient and cost-effective ways of extracting the metal. Today, aluminum alloys are abundant and found in a variety of industrial and consumer products.

How is Aluminum Made?

Aluminum is produced through two methods: primary production and secondary production.

Primary Production

Aluminum production begins with extracting bauxite, an ore found in the topsoil in many tropical and subtropical regions of the world. Chemists then produce the chemical compound aluminum oxide, also known as alumina, from bauxite using a method known as the Bayer process.

Every two pounds of bauxite produces one pound of alumina. Through a process known as Hall-Heroult, aluminum producers smelt aluminum oxide and refine it into pure aluminum metal. Every two pounds of aluminum oxide produces one pound of aluminum.

Secondary Production

Secondary production of aluminum involves recycling scrap aluminum into new aluminum. The process uses less energy than primary production and is more environmentally friendly.

Producers extract aluminum from waste streams and prepare to recycle it. Aluminum producers sort the scrap by its chemical properties. Scrap with one type of chemical composition has more value than scrap containing several alloys.

After sorting, aluminum refiners place the scrap into melting furnaces and turn it into molten aluminum. The molten aluminum can be cast into two types of large slabs – ingots and billets. Ingots can be rolled into sheet aluminum, while billets can be extruded into different shapes.

Aluminum Sheets & Ingots. ScienceImage

Where Does Aluminum Come From?

Global primary aluminum producers smelt about 60 million metric tons annually. Chinese primary producers account for more than half of the global supply of aluminum.

Top 10 Aluminum Producing Countries

A map of the world, illustrating Primary Aluminum Production by country.

Rank Flag Country Thousand Metric Tons
#1 China 31,400
#2 Russia 3,580
#3 Canada 3,250
#4 India 2,750
#5 United Arab Emirates 2,400
#6 Australia 1,680
#7 Norway 1,230
#8 Bahrain 970
#9 United States of America 840
#10 Iceland 800

Demand

Global demand for aluminum is concentrated in China where urbanization has created strong demand. China consumes about 40% of the global annual supply of aluminum. Japan, the European Union and the United States are the next largest consumers of the metal.

Aluminum is lightweight, recyclable and corrosion-resistant, which makes it ideal for numerous industrial uses. The following industries represent the largest consumers of the metal:

Use of Aluminum Description
Aerospace

Aluminum alloys are used in aircraft and rocket construction. Aluminum cans

Manufacturers package sodas and other beverages in aluminum due to the metal’s ability to cool down quickly. Automobiles

Hoods and other lightweight aluminum parts maintain fuel efficiency in cars. Building and Construction

Aluminum is an energy-efficient and sustainable material. The vast majority of aluminum used in construction is from recycled materials. Electrical

Aluminum is an excellent conductor of electricity and is used in electrical wiring. Electronics and Appliances Appliances including washing machines, refrigerators and laptops use aluminum. Foil and Packaging Medicine packets, candies and TV dinners are a small sample of the items that use foil packaging. Miscellaneous

Solar panel nanotechnology and aluminum-air batteries are two new technologies that use aluminum.

What Drives the Price of Aluminum?

Many global industries use aluminum in their products, so the price is a good barometer of the overall health of the world economy. These are the five most important factors that influence aluminum prices:

  1. Chinese Demand
  2. Transportation Demand
  3. Construction Industry Demand
  4. Input Costs
  5. The US dollar

Chinese Demand

China uses over 40% of the annual global supply of aluminum and, therefore, is the biggest driver of its price. Strong growth in Chinese GDP over the past two decades has pushed many industrial commodity prices higher.

Chinese companies have an increasing demand for aluminum in the packaging sector. Additionally, real estate, transportation and the electronics sectors have all seen growth in their demand for aluminum.

Transportation Demand

In the developed world, automobiles and aerospace are the most important markets for aluminum. The aluminum industry faces competition from lighter composite materials that seek to replace aluminum as a construction material. Carbon fiber materials, for example, account for a growing share of the aviation market. As composite materials make technological advances and become more affordable, demand for aluminum may wane.

Construction Industry Demand

The construction and building markets represent the second largest industrial demand for aluminum. In developing countries, aluminum accounts for about 30% of building materials. Construction growth rates can be volatile. Interest rates, unemployment and overall economic strength can affect demand and, in turn, influence the price of aluminum.

Input Costs

The costs of producing aluminum can have a meaningful impact on its price. Aluminum production uses large amounts of energy in the smelting process. Changes in the cost of oil or electricity ultimately feed into the price of aluminum. In the case of recycled aluminum, the cost of scrap metal can also have a direct impact on prices for the finished product.

The US dollar

The US currency is the world’s reserve currency and as a result, aluminum and other commodities are quoted in US dollars. Aluminum producers receive fewer dollars for their product when the US currency is strong and more dollars when the currency is weak.

Futures Trading Basics

A futures contract is a standardized contract that calls for the delivery of a specific quantity of a specific product at some time in the future at a predetermined price. Futures contracts are derivative instruments very similar to forward contracts but they differ in some aspects.

Futures contracts are traded in futures exchanges worldwide and covers a wide range of commodities such as agriculture produce, livestock, energy, metals and financial products such as market indices, interest rates and currencies.

Why Trade Futures?

The primary purpose of the futures market is to allow those who wish to manage price risk (the hedgers) to transfer that risk to those who are willing to take that risk (the speculators) in return for an opportunity to profit.

Hedging

Producers and manufacturers can make use of the futures market to hedge the price risk of commodities that they need to purchase or sell in order to protect their profit margins. Businesses employ a long hedge to lock in the price of a raw material that they wish to purchase some time in the future. To lock in a selling price for a product to be sold in the future, a short hedge is used.

Speculation

Speculators assume the price risk that hedgers try to avoid in return for a possibility of profits. They have no commercial interest in the underlying commodities and are motivated purely by the potential for profits. Although this makes them appear to be mere gamblers, speculators do play an important role in the futures market. Without speculators bridging the gap between buyers and sellers with a commercial interest, the market will be less fluid, less efficient and more volatile.

Futures speculators take up a long futures position when they believe that the price of the underlying will rise. They take up a short futures position when they believe that the price of the underlying will fall.

Example of a Futures Trade

In March, a speculator bullish on soybeans purchased one May Soybeans futures at $9.60 per bushel. Each Soybeans futures contract represents 5000 bushels and requires an initial margin of $3500. To open the futures position, $3500 is debited from his trading account and held by the exchange clearinghouse.

Come May, the price of soybeans has gone up to $10 per bushel. Since the price has gone up by $0.40 per bushel, the speculator can exit his futures position with a profit of $0.40 x 5000 bushels = $2000.

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Continue Reading.

Buying Straddles into Earnings

Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]

Writing Puts to Purchase Stocks

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]

What are Binary Options and How to Trade Them?

Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]

Investing in Growth Stocks using LEAPS® options

If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. [Read on. ]

Effect of Dividends on Option Pricing

Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]

Bull Call Spread: An Alternative to the Covered Call

As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]

Dividend Capture using Covered Calls

Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]

Leverage using Calls, Not Margin Calls

To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]

Day Trading using Options

Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]

What is the Put Call Ratio and How to Use It

Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]

Understanding Put-Call Parity

Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]

Understanding the Greeks

In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]

Valuing Common Stock using Discounted Cash Flow Analysis

Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]

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