In this blog of Hedging with Jorge, we take a practical look at call options and put options – two fundamental tools in commodity hedging. Whether you’re new to aluminium trading or brushing up on your knowledge, this guide will help you understand the rights, obligations and potential positions behind each strategy.

On popular demand, Jorge’s second edition of Aluminium and Other Base Metals: Understanding Risk Management and Hedging starts August 26, 2025. Register now: LINK

Understanding call options

A call option is the right to buy a commodity at a specific price (strike price) before a set expiry date.

• Buying a call: You pay a premium for the right to buy. If the market price is higher than your strike price at expiry, you exercise your right to buy at the lower price. If it’s not beneficial, you simply let it expire.
• Selling a call: Instead of buying, you grant someone else the right to buy from you. In return, you receive a premium. If the market price exceeds the strike price, they will exercise the option and you will need to sell at the agreed price.

Understanding put options

A put option is the right to sell a commodity at a specific strike price before expiry.

• Buying a put: You pay a premium for the right to sell. If the market price falls below your strike price, you exercise the option to sell at the higher agreed price. If the market is higher, you let it expire.
• Selling a put: You give someone else the right to sell to you. If the market falls below the strike price, they will exercise their right and you will buy at that price, leaving you potentially long in the market.

The four core scenarios in options

• Buying a call → Potentially long
• Selling a call → Potentially short
• Buying a put → Potentially short
• Selling a put → Potentially long

Think of it like this:

• Calls = Right to buy
• Puts = Right to sell
• Buying gives you a right; selling gives someone else a right over you.

A practical example

Let’s say aluminium is priced at USD 2,600 per tonne:

• Buying a put: You pay USD 120 for the right to sell at USD 2,600. If the market drops to USD 2,550, you sell at the higher strike price.
• Selling a put: You receive USD 150 for granting the right to sell to you at USD 2,600. If the market falls to USD 2,550, the buyer will exercise their option and you buy at USD 2,600, becoming long in the market.

Why this matters for aluminium market participants

Understanding these positions is critical for anyone managing aluminium price risks, whether you are a consumer, producer, trader, or investor. Calls and puts are the foundation for advanced hedging tools, like the zero-cost collar, which we’ll explore in the next episode, first from the consumer’s perspective, then from the producer’s.

Until then, remember: listen, review and revisit these concepts until they feel second nature. That’s the key to mastering hedging strategies in the aluminium market.