514 Part V: Index Options and Futures 
OPTION PREMIUMS 
The dollar amount of trading of a futures option contract is normally the same as that 
of the underlying future. That is, since the S&P 500 future is worth $250 per point, 
so are the S&P 500 futures options. The same holds true for the New York Stock 
Exchange Index options. 
Example: An investor buys an S&P 500 December 1410 call for 4.20 with the index 
at 1409.50. The cost of the call is $1,050 (4.20 x 250). The call must be paid for in 
full, as with equity options. 
An interesting fact about futures options is that the longer-term options have a 
"double premium" effect. The option itself has time value premium and its underly­
ing security, the future, also has a premium over the physical commodity. This phe­
nomenon can produce some rather startling prices when looking at calendar spreads. 
Example: The ZYX Index is trading at 162.00 sometime during the month of 
January. Suppose that the March ZYX futures contract is trading at 163.50 and the 
June futures contract at 167.50. These prices are reasonable in that they represent a 
premium over the index itself which is 162.00. These premiums are related to the 
amount of time remaining until the expiration of the futures contract. 
Now, however, let us look at two options - the March 165 put and the June 165 
put. The March 165 put might be trading at 3 with its underlying security, the March 
futures contract, trading at 163.50. The June 165 put option has as its underlying 
security the June futures contract. Since the June option has more time remaining 
until expiration, it will have more time value premium than a March option would. 
However, the underlying June future is trading at 167.50, so the June 165 put option 
is 2½ points out-of-the-money and therefore might be selling for 2½. This makes a 
very strange-looking calendar spread with the longer-term option selling at 2½ and 
the near-term option selling for 3. This is due to the fact, of course, that the two 
options have different underlying securities. One is in-the-money and the other is 
out-of-the-money. These two underlyings - the March and June futures - have a 
price differential of their own. So the option calendar spread is inverted due to this 
double premium effect. 
FUTURES OPTION MARGIN 
Most futures exchanges have gone to the form of option margin called SPAN, which 
stands for Standard Portfolio Analysis of Risk. This form of margining is very fair and 
attempts to base the margin requirement of an option position on the probability of