Chapter 35: Futures Option Strategies for Futures Spreads 711 
or out-of-the-money puts instead of selling futures, he could be exposing his spread 
profits to the ravages of time decay. Do not substitute at- or out-of-the-rrwney options 
for the futures in intramarket or intennarket spreads. The next example will show 
why not. 
Example: A futures spreader notices that a favorable situation exists in wheat. He 
wants to buy July and sell May. The following prices exist for the futures and options: 
May futures: 410 
July futures: 390 
May 410 put: 20 
July 390 call: 25 
This trader decides to buy the May 410 put instead of selling May futures; he 
also buys the July 390 call instead of buying July futures. 
Later, the following prices exist: 
May futures: 400 
July futures: 400 
May 410 put: 25 
July 390 call: 30 
The futures spread would have made 20 points, since they are now the same 
price. At least this time, he has made money in the option spread. He has made 5 
points on each option for a total of 10 points overall - only half the money that could 
have been made with the futures themselves. Nate that these sample option prices 
still show a good deal of time value premium remaining. If more time had passed and 
these options were trading closer to parity, the result of the option spread would be 
worse. 
It might be pointed out that the option strategy in the above example would 
work better if futures prices were volatile and rallied or declined substantially. This 
is true to a certain extent. If the market had moved a lot, one option would be very 
deeply in-the-money and the other deeply out-of-the-money. Neither one would 
have much time value premium, and the trader would therefore have wasted all the 
money spent for the initial time premium. So, unless the futures moved so far as to 
outdistance that loss of time value premium, the futures strategy would still outrank 
the option strategy. 
However, this last point of volatile futures movement helping an option position 
is a valid one. It leads to the reason for the only favorable option strategy that is a sub-