710 Part V: Index Options and Futures 
Let's spend a short time discussing these two points. First, he does not want to 
increase his risk. In general, selling options instead of utilizing futures increases one's 
risk. If he sells calls instead of selling futures, and sells puts instead of buying futures, 
he could be increasing his risk tremendously if the futures prices moved a lot. If the 
futures rose tremendously, the short calls would lose money, but the short puts would 
cease to make money once the futures rose through the striking price of the puts. 
Therefore, it is not a recommended strategy to sell options in place of the futures in 
an intramarket or intennarket spread. The next example will show why not. 
Example: A spreader wants to trade an intramarket spread in live cattle. The con­
tract is for 40,000 pounds, so a one-cent move is worth $400. He is going to sell April 
and buy June futures, hoping for the spread to narrow between the two contracts. 
The following prices exist for live cattle futures and options: 
April future: 78.00 
June future: 74.00 
April 78 call: 1.25 
June 74 put: 2.00 
He decides to use the options instead of futures to implement this spread. He 
sells the April 78 call as an alternative to selling the April future; he also sells the June 
74 put as an alternative to buying the June future. 
Sometime later, the following prices exist: 
April future: 68.00 
June future: 66.00 
April 78 call: 0.00 
June 74 put: 8.05 
The futures spread has indeed narrowed as expected - from 4.00 points to 2.00. 
However, this spreader has no profit to show for it; in fact he has a loss. The call that 
he sold is now virtually worthless and has therefore earned a profit of 1.25 points; 
however, the put that was sold for 2.00 is now worth 8.05 - a loss of 6.05 points. 
Overall, the spreader has a net loss of 4.80 points since he used short options, instead 
of the 2.00-point gain he could have had if he had used futures instead. 
The second thing that the futures spreader wants to ensure is that he does not 
pay for a lot of time value premium that is wasted, costing him his potential profits. 
If he buys at- or out-of-the-money calls instead of buying futures, and if he buys at-