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.