Chapter 34: Futures and Futures Options 691 
ridiculously far out-of-the-money options, as one is wasting his theoretical advantage 
if the futures do not have a realistic chance to climb to the striking price of the writ­
ten options. Finally, do not attempt to use overly large ratios in order to gain the most 
theoretical advantage. This is an important concept, and the next example illustrates 
it well. 
Example: Assume the same pricing pattern for January soybean options that has 
been the basis for this discussion. January beans are trading at 583. The (novice) 
strategist sees that the slightly in-the-money January 575 call is the cheapest and the 
deeply out-of-the-money January 675 call is the most expensive. This can be verified 
from either of two previous tables: the one showing the actual price as compared to 
the "theoretical" price, or Table 34-2 showing the implied volatilities. 
Again, one would use the deltas (see Table 34-2) to create a neutral spread. A 
neutral ratio of these two would involve selling approximately six calls for each one 
purchased. 
Buy 1 January bean 575 call at 191/z 
Sell 6 January bean 675 calls at 21/4 
Net position: 
191/z DB 
131/z CR 
6 Debit 
Figure 34-3 shows the possible detrimental effects of using this large ratio. 
While one could make 94 points of profit if beans were at 675 at January expiration, 
he could lose that profit quickly if beans shot on through the upside break-even 
point, which is only 693.8. The previous formulae can be used to verify these maxi­
mum profit and upside break-even point calculations. The upside break-even point 
is too close to the striking price to allow for reasonable follow-up action. Therefore, 
this would not be an attractive position from a practical viewpoint, even though at 
first glance it looks attractive theoretically. 
It would seem that neutral spreading could get one into trouble if it "recom­
mends" positions like the 6-to-l ratio spread. In reality, it is the strategist who is get­
ting into trouble if he doesn't look at the whole picture. The statistics are just an aid 
- a tool. The strategist must use the tools to his advantage. It should be pointed out 
as well that there is a tool missing from the toolkit at this point. There are statistics 
that will clearly show the risk of this type of high-rati<,Yspread. In this case, that tool 
is the gamma of the option. Chapter 40 covers the -Lise of gamma and other more 
advanced statistical tools. This same example is expanded in that chapter to include 
the gamma concept.