690 Part V: Index Options and Futures 
WHICH STRATEGY TO USE 
The profit potential of the put backspread is obviously far different from that of the 
call ratio spread. They are similar in that they both offer the strategist the opportu­
nity to benefit from spreading mispriced options. Choosing which one to implement 
(assuming liquidity in both the puts and calls) may be helped by examining the tech­
nical picture ( chart) of the futures contract. Recall that futures traders are often more 
technically oriented than stock traders, so it pays to be aware of basic chart patterns, 
because others are watching them as well. If enough people see the same thing and 
act on it, the chart pattern will be correct, if only from a "self-fulfilling prophecy" 
viewpoint if nothing else. 
Consequently, if the futures are locked in a (smooth) downtrend, the put strat­
egy is the strategy of choice because it offers the best downside profit. Conversely, if 
the futures are in a smooth uptrend, the call strategy is best. 
The worst result will be achieved if the strategist has established the call ratio 
spread, and the futures have an explosive rally. In certain cases, very bullish rumors 
- weather predictions such as drought or El Nifio, foreign labor unrest in the fields 
or mines, Russian buying of grain - will produce this mispricing phenomenon. The 
strategist should be leery of using the call ratio spread strategy in such situations, 
even though the out-of-the-money calls look and are ridiculously expensive. If the 
rumors prove true, or if there are too many shorts being squeezed, the futures can 
move too far, too fast and seriously hurt the spreader who has the ratio call spread in 
place. His margin requirements will escalate quickly as tl1e futures price moves high­
er. The option premiums will remain high or possibly even expand if the futures rally 
quickly, thereby overriding the potential benefit of time decay. Moreover, if the fun­
damentals change immediately - it rains; the strike is settled; no grain credits are 
offered to the Russians - or rumors prove false, the futures can come crashing back 
down in a hurry. 
Consequently, if rumors of fundamentals have introduced volatility in the 
futures rnarket, implement the strategy with the put backspread. The put backspread 
is geared to taking advantage of volatility, and this fundamental situation as described 
is certainly volatile. It may seem that because the market is exploding to the upside, 
it is a waste of time to establish the put spread. Still, it is the wisest choice in a volatile 
market, and there is always the chance that an explosive advance can turn into a quick 
decline, especially when the advance is based on rumors or fundamentals that could 
change overnight. 
There are a few "don'ts" associated with the ratio call spread. Do not be tempt­
ed to use the ratio spread strategy in volatile situations such as those just described; 
it works best in a slowly rising market. Also, do not implement the ratio spread with