It almost seems counterintuitive. Could copper prices actually decline in the midst of a global economic recovery that seems to be gaining momentum?

It may, if you accept some basic supply/demand metrics. No question that there is strong demand, especially from China. But despite that, supply continues to outstrip consumption.

Data from the International Copper Study Group for the period from January to October 2009 showed a copper inventory surplus of 78,000 tonnes. In addition, monthly output in the major copper mining areas of South America, Africa, and Asia continues to climb. And low production costs has stimulated investment in exploration and development. Some pretty solid metrics for the supply side.

Now look at demand. China is continuing to tighten monetary accommodation and rein in inflation. That has to weigh on demand for copper into the foreseeable future. In fact, imports have already slowed considerably from the peak 2009 levels. Albeit that was a time when China seemed to be on a crusade to buy all the copper in the world.

If you are an aggressive option trader who buys into the supply/demand metrics, you might want to look at puts on smaller copper producers like Quadra Mining Ltd. (TSX: QUA). Smaller producers are more closely levered to the price of copper than larger diversified giants like Rio Tinto or BHP Billiton.

The premiums on QUA options are expensive. At-the-money QUA options are trading at 47% implied volatilities, which positions them in the top 10% of all Canadian equity options. But having said that, the option’s implied volatility is still less than the 62% historic volatility of the underlying stock.

As for a trade, look at buying the QUA March 15 puts at 80 cents.