718 Part V: Index Options and Futures 
example, the conservative action would be to sell three heating oil futures against the 
heating oil calls. 
The more aggressive course is to hedge the in-the-money option with the future 
underlying the other side of the intermarket spread. In the above example, that 
would entail selling the unleaded gasoline futures against the heating oil calls. 
Suppose that the strategist in the previous example decides to take the conser­
vative action, and he therefore shorts three heating oil futures at .7100, the current 
price. This action preserves large profit potential in either direction. It is better than 
selling out-of-the-money options against his current position. 
He would consider removing the hedge if futures prices dropped, perhaps 
when the puts returned to an in-the-money status with a put delta of at least -0. 75 
or so. At that point, the position would be at its original status, more or less, except 
for the fact that he would have taken a nice profit in the three futures that were sold 
and covered. 
Epilogue. The above examples are taken from actual price movements. In reality, 
the futures fell back, not only to their original price, but far below it. The funda­
mental reason for this reversal was that the weather was warm, hurting demand for 
heating oil, and gasoline supplies were low. By the option expiration in December, 
the following prices existed: 
January heating oil futures: .5200 
January unleaded gas futures: .5200 
Not only had the futures prices virtually crashed, but the intermarket spread 
had been decimated as well. The spread had fallen to zero! It had never reached any­
thing near the 12-cent potential that was envisioned. Any spreader who had estab­
lished this spread with futures would almost certainly have lost money; he probably 
would not have held it until it reached this lowly level, but there was never much 
opportunity to get out at a profit. 
The strategist who established the spread with options, however, most certain­
ly would have made money. One could safely assume that he covered the three 
futures sold in the previous example at a nice profit, possibly 7 points or so. One 
could also assume that as the puts became in-the-money options, he established a 
similar hedge and bought three unleaded gasoline futures when the EFP reached 
-3.00. This probably occurred with unleaded gasoline futures around .5700-5 cents 
in the money. 
Assuming that these were the trades, the following table shows the profits and 
losses.