694 Part V: Index Options and Futures 
Example: The put backspread was established under the following conditions: 
Strike 
550 
600 
Put 
Price 
Theoretical 
Put Price 
5.4 
27.6 
Implied 
Volatility 
13% 
17% 
If January soybean futures should fall to 550, one would expect the implied 
volatility of the January 550 puts that are owned to be about 16% or 17%, since they 
would be at-the-money at that time. This makes the assumption that the at-the­
money puts will have about a 17% implied volatility, which is what they had when the 
position was established. 
Since the strategy involves being long a large quantity of January 550 puts, this 
increase in implied volatility as the futures drop in price will be of benefit to the 
spread. 
Note that the implied volatility of the January 600 puts would increase as well, 
which would be a small negative aspect for the spread. However, since there is only 
one put short and it is quite deeply in the money with the futures at 550, this nega­
tive cannot outweigh the positive effect of the expansion of volatility on the long 
January 550 puts. 
In a similar manner, the call spread would benefit. The implied volatility of the 
written options would actually drop as the futures rallied, since they would be less far 
out-of-the-money than they originally were when the spread was established. While 
the same can be said of the long options in the spread, the fact that there are extra, 
naked, options means the spread will benefit overall. 
In summary, the futures option strategist should be alert to mispricing situations 
like those described above. They occur frequently in a few commodities and occa­
sionally in others. The put backspread strategy has limited risk and might therefore 
be attractive to more individuals; it is best used in downtrending and/or volatile mar­
kets. However, if the futures are in a smooth uptrend, not a volatile one, a ratio call 
spread would be better. In either case, the strategist has established a spread that is 
statistically attractive because he has sold options that are expensive in relation to the 
ones that he has bought.