Options Corner: Teck Resources Speculators Dig Beyond The Obvious Copper Trade

With President Donald Trump's proposal of tariffs on copper imports possibly coming to fruition within a matter of weeks, investors have decided to front-run the expected demand surge for the critical metal.

While this backdrop bolsters the core narrative of mining and mineral development specialist Teck Resources Ltd TECK, the complexity of globalized supply chains and geopolitics could ultimately lift Teck stock.

Late last month, Trump signed an order directing the Commerce Department to explore the implications of copper imports under the context of national security. The move sparked analysis by leading institutions such as Goldman Sachs and Citigroup, which predicted a 25% tariff on foreign-sourced copper by year-end.

Subsequently, copper has been one of the hottest assets, recently blowing past record highs. It's not just about imminent tariffs that has inspired the move higher, though the levies represent a major cynical catalyst. Rather, other tailwinds — including brighter economic prospects for China thanks to stimulus programs and tightening supply of the metal — have contributed to the rise.

Plus, it's important to understand the utility of the asset. Although copper underpins various industrial infrastructures, it has become increasingly important for the technology ecosystem. For example, data centers consumer a considerable amount of the metal. Since data centers are intertwined with artificial intelligence — providing the computing power, storage and infrastructure to train and deploy machine learning models — copper demand could remain buoyant.

Over the long run, this framework could be a positive catalyst for Teck stock. Yet, it's another mineral that deserves a closer inspection.

TECK Stock Isn't Just a Copper Trade

While the copper storyline is powerful, it's also fair to point out that it's now a much-discussed trend. Generally, the most robust rewards stem from moves that many others don't anticipate until they actually materialize. However, TECK stock isn't just a play on copper.

Instead, the underlying resource producer is one of the world leaders in the extraction of specialty metals, particularly germanium. Classified as a critical mineral by the federal government, germanium represents a vital component of applications in defense, manufacturing and telecommunications. It also offers consumer-related relevancies due to its infrared transparency and properties as a semiconductor.

What makes Teck stock truly intriguing, though, is the clashing of intricate supply chains with geopolitics. As a retaliatory action against former President Joe Biden's export controls on certain semiconductor equipment and components, China banned several rare earth mineral exports to the U.S., among them germanium.

In other words, the Trump administration needs to play its cards carefully to avoid major economic and structural disruptions. It's not terribly surprising, then, that the White House has often gone back and forth regarding the magnitude of proposed levies. Still, even with a more accommodating political framework, it wouldn't change the harsh reality: copper, germanium and other important resources are only rising in relevance due to accelerating global demand.

From an investment perspective, Teck stock is a tempting proposition because of its upward bias. Using data from January 2019, a long position held for any given eight-week period has a 56% chance of being profitable. What's interesting about this setup is that under the dynamic conditions of modest volatility, investor sentiment tends to improve.

Specifically, following a weekly loss of up to 5%, a subsequent eight-week-long position has over a 59% chance of being profitable. Currently, Teck stock is losing around 4% in the past five sessions. Based on historical trends, a sentiment reversal may materialize over the next three weeks.

Thinking Ahead with a Bullish Strategy

For aggressive traders, a bull call spread strategy for the options chain expiring April 17 may be enticing. Specifically, speculators may research the 40/42 call spread, which involves buying the $40 call (at a time-of-writing ask of $190) and simultaneously selling the $42 call (at a bid of $98). The proceeds from the short call partially offset the debit paid for the long call, resulting in a cash outlay of $92.

Naturally, the trader hopes Teck will reach the short strike price target of $42 at expiration. If the thesis pans out, the trader receives the difference in the strike prices (multiplied by 100 shares) minus the net debit paid for the transaction. Right now, the maximum reward is $108, or a payout of over 117%.

For the above transaction to be fully profitable, Teck share prices would need to rise more than 4%. Conservative speculators can lower the short strike target to $41 in the above call spread to improve the odds of success. However, this would also dramatically lower the max payout to around 56%.

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