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training_data/relevant/text/47e5fc5a0675dccf6cf7ec8d618ccde2775be2a0762a2a9b36d9292f73448ced.txt

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+706 Part V: Index Options and Futures 
+futures are approximately unchanged at expiration of the March options, he should 
+profit handsomely, because the March calls are slightly overpriced at the current 
+time, plus they will decay at a faster rate than the May calls over the next two months. 
+Suppose that he is correct and March futures are unchanged at expiration of the 
+March options. This is still no guarantee of profit, because one must also determine 
+where May futures are trading. If the spread between May and March futures 
+behaves poorly (May declines with respect to March), then he might still lose money. 
+Look at the following table to see how the futures spread between March and May 
+futures affects the profitability of the calendar spread. The calendar spread cost 7 
+debit when the futures spread was +4 initially. 
+Futures Calendar 
+Futures Prices Spread May 600 Call Spread 
+March/May Price Price Profit/Loss 
+594/570 -24 4 -3 cents 
+594/580 -14 61/2 _1/2 
+594/590 -4 10 +3 
+594/600 +6 141/2 +71/2 
+Thus, the calendar spread could lose money even with March futures 
+unchanged, as in the top two lines of the table. It also could do better than expected 
+if the futures spread widens, as in the bottom line of the table. 
+The profitability of the calendar spread is heavily linked to the futures spread 
+price. In the above example, it was possible to lose money even though the March 
+futures contract was unchanged in price from the time the calendar spread was 
+initially established. This would never happen with stock options. If one placed a 
+calendar spread on IBM and the stock were unchanged at the expiration of the near­
+term option, the spread would make money virtually all of the time ( unless implied 
+volatility had shrunk dramatically). 
+The futures option calendar spreader is therefore trading two spreads at once. 
+The first one has to do with the relative pricing differentials (implied volatilities, for 
+example) of the two options in question, as well as the passage of time. The second 
+one is the relationship between the two underlying futures contracts. As a result, it is 
+difficult to draw the ordinary profit picture. Rather, one must approach the problem 
+in this manner: 
+1. Use the horizontal axis to represent the futures spread price at the expiration of 
+the near-term option.