Options Corner: Copper Tariff Fears Spark Pragmatic Trade In Southern Copper

Easily one of the most consequential decisions in recent memory, President Donald Trump reaffirmed earlier this week that his administration will proceed with tariffs on imports from Canada and Mexico. Within this high-level action, the administration also signed an executive order on Tuesday which authorizes an analysis on the national security and economic impact of imports of copper and other commodities. Subsequently, Southern Copper Corp SCCO has been marching higher.

Fundamentally, as the New York Times reported, the investigation will help determine the net viability of tariffs applied on copper. A critical commodity, the manufacturing and construction industries widely use the metal. It's also a critical component for the U.S. military. Perhaps most pertinent to the current ecosystem, copper represents one of the unsung heroes of artificial intelligence.

While such a notion may sound odd at first blush, a drop in demand for the commodity represented one of the less-discussed anxieties tied to the DeepSeek impact, the Chinese AI model that roiled the tech sector in late January. Data centers fuel copper demand so a paradigm shift in machine intelligence could have significant implications for its supply chain.

To be completely transparent, the narrative for SCCO stock isn't completely bullish. For one thing, the copper tariffs may never materialize, which could sink momentum. Second, even if tariffs occur, it's not clear that such an action would be positive. One of the lessons from Trump 1.0 is that tariffs ultimately hurt copper stocks.

Technical and Statistical Backdrop Could Gently Push SCCO Stock Higher

Although the long-term prospects for SCCO stock remain up in the air, intrepid traders can potentially front run tomorrow's headlines. Effectively, the idea is to leverage the concept colloquially known as buy the rumor, sell the news. Enticingly, those tempted to engage this trading idea may have supporting arguments from technical analysis and statistical tendencies.

First, it's possible that SCCO stock is currently charting a pattern reminiscent of a bullish pennant formation. Market technicians will almost certainly argue that the current pattern doesn't meet the criteria of a "classic" pennant. Admittedly, it's not the strongest argument for optimism in Southern Copper. That said, it's intriguing that a formation resembling a pennant has materialized amid a key fundamental development.

Second and more convincing — at least to some traders — is the statistical framework. Using pricing data going back to January 2019, SCCO stock demonstrates an upward bias. A position entered at the beginning of the week has a 52.34% chance of rising by the end of it. Over the next eight weeks, the long odds rise to 57.32%.

It's also worth noting that these probabilities don't shift materially under dynamic conditions. Specifically, SCCO stock lost 4.4% last week. Historically, though, when SCCO loses up to 5% in a one-week period, bullish probabilities have a tendency of pushing forward relative to the baseline. For instance, in the subsequent week following modest volatility, SCCO's long odds rose to 56.64%, a small but noticeable improvement over 52.34%.

Two Possible Approaches To Consider

By law, the commerce secretary, Howard Lutnick, who will spearhead the aforementioned economic analysis on foreign copper, has 270 days to present a report to the president. However, the New York Times mentioned that Peter Navarro, a senior counselor for trade and manufacturing, stated that Lutnick would move "in Trump time, which is as quickly as possible."

Of course, traders must then speculate as to what that will actually mean. For those who are thinking short term, there are two avenues available.

The first avenue is the riskiest, which involves a bull call spread for the options chain expiring March 21. Assuming the positive scenario, the median return over a three-week period will land somewhere in the neighborhood of 5.5% or potentially a bit higher. Based on an estimated price of $94, this projection would translate to an upside target in the neighborhood of $100.

With that in mind, extremely aggressive traders could target the 97.50/100 bull spread. This transaction involves buying the $97.50 March 21 call at an ask of $285 and selling the $100 March 21 call at a bid of $165. The trader uses the proceeds from the short call to partially offset the debit paid for the long call, leading to a net debit of $120. The maximum payout should SCCO reach $100 or above at expiration is $130, or 108.33%.

The other idea, which is still wildly risky, is to consider the 100/105 bull call spread for the options chain expiring April 17 (the Friday of that week is a holiday). Over an eight-week period — assuming the current week as the first — the positive scenario has historically demonstrated a median return of 13.14%, projecting SCCO stock to hit $106.35.

Therefore, it's theoretically reasonable to believe that SCCO has a chance to hit the $105 short strike price target at expiration. However, a lot of things have to go right over the next several weeks.