523
OPTION TrAdINg STrATegIeS
Comment. As can be verified by comparing Figure 35.11b to Figure 35.3c, this strategy is virtually 
equivalent to buying an in-the-money call. Supplementing a long futures position with the purchase 
of an out-of-the-money put will result in slightly poorer results if the market advances, or declines 
moderately, but will limit the magnitude of losses in the event of a sharp price decline. Thus, much 
like the long in-the-money call position, this strategy can be viewed as a long position with a built-
in stop.
In most cases, it will make more sense for the trader to simply buy an in-the-money call since 
the transaction cost will be lower. However, if a speculator is already long futures, the purchase of 
an out-of-the-money put might present a viable alternative to liquidating this position and buying an 
in-the-money call.
Strategy 12a: Option-protected Short Futures (Short Futures + Long 
at-the-Money Call)
example. Sell August gold futures at $1,200/oz and simultaneously buy an August $1,200 gold call 
at a premium of $38.80/oz ($3,880). (See Table 35.12a and Figure 35.12a.)
Comment. A frequently recommended strategy is that the trader implementing (or holding) a short 
futures position can consider buying a call to protect his upside risk. The basic idea is that if the mar-
ket advances, the losses in the short futures position will be offset dollar for dollar by the long call 
position. Although this premise is true, it should be stressed that such a combined position represents 
nothing more than a proxy for a long put. The reader can verify the virtually identical nature of these 
two alternative strategies by comparing Figure 35.12a to Figure 35.5a. If prices decline, the short 
futures position will gain, while the option will expire worthless. And if prices advance, the loss in the 
combined position will equal the premium paid for the call. In fact, if the put and call premiums are 
equal, a short futures plus long call position will be precisely equivalent to a long put.
tabLe 35.12a  profit/Loss Calculations: Option-protected Short Futures—Short Futures + Long at-the-
Money Call (Similar to Long at-the-Money put)
(1) (2) (3) (4) (5) (6)
Futures price at 
expiration ($/oz)
premium of august $1,200 
Call at Initiation ($/oz)
$ amount of 
premium paid
profit/Loss on Short 
Futures position
Call Value at 
expiration
profit/Loss on position 
[(4)+ (5) – (3)]
1,000 38.8 $3,880 $20,000 $0 $16,120
1,050 38.8 $3,880 $15,000 $0 $11,120
1,100 38.8 $3,880 $10,000 $0 $6,120
1,150 38.8 $3,880 $5,000 $0 $1,120
1,200 38.8 $3,880 $0 $0 –$3,880
1,250 38.8 $3,880 –$5,000 $5,000 –$3,880
1,300 38.8 $3,880 –$10,000 $10,000 –$3,880
1,350 38.8 $3,880 –$15,000 $15,000 –$3,880
1,400 38.8 $3,880 –$20,000 $20,000 –$3,880