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+712 Part V: Index Options and Futures 
+stitute for futures spreads - that is, using in-the-money options. If one buys in-the­
+rnoney calls instead of buying futures, and buys in-the-money puts instead of selling 
+futures, he can often create a position that has an advantage over the intramarket or 
+intermarket futures spread. In-the-money options avoid most of the problems 
+described in the two previous examples. There is no increase of risk, since the options 
+are being bought, not sold. In addition, the amount of money spent on time value 
+premium is small, since both options are in-the-money. In fact, one could buy them 
+so far in the money as to virtually eliminate any expense for time value premium. 
+However, that is not recommended, for it would negate the possible advantage of 
+using moderately in-the-money options: If the underlyingfutures behave in a volatile 
+manner, it might be possible for the option spread to make money, even if the futures 
+spread does not behave as expected. 
+In order to illustrate these points, the TED spread, an intermarket spread, will 
+be used. Recall that in order to buy the TED spread, one would buy T-bill futures 
+and sell an equal quantity of Eurodollar futures. 
+Options exist on both T-bill futures and Eurodollar futures. If T-bill calls were 
+bought instead of T-bill futures, and if Eurodollar puts were bought instead of sell­
+ing Eurodollar futures, a similar position could be created that might have some 
+advantages over buying the TED spread using futures. The advantage is that if T-bills 
+and/or Eurodollars change in price by a large enough amount, the option strategist 
+can make money, even if the TED spread itself does not cooperate. 
+One might not think that short-term rates could be volatile enough to make this 
+a worthwhile strategy. However, they can move substantially in a short period of time, 
+especially if the Federal Reserve is active in lowering or raising rates. For example, 
+suppose the Fed continues to lower rates and both T-bills and Eurodollars substan­
+tially rise in price. Eventually, the puts that were purchased on the Eurodollars will 
+become worthless, but the T-bill calls that are owned will continue to grow in value. 
+Thus, one could make money, even if the TED spread was unchanged or shrunk, as 
+long as short-term rates dropped far enough. 
+Similarly, if rates were to rise instead, the option spread could make money as 
+the puts gained in value (rising rates mean T-bills and Eurodollars will fall in price) 
+and the calls eventually became worthless. 
+Example: The following prices for June T-bill and Eurodollar futures and options 
+exist in January. All of these products trade in units of 0.01, which is worth $25. So a 
+whole point is worth $2,500. 
+June T-bill futures: 94.75 
+June Euro$ futures: 94.15