Chapter 35: Futures Option Strategies for Futures Spreads 
Future or Option 
January heating oil futures: 
January unleaded gasoline futures: 
January heating oil 60 call: 
January unleaded gas 62 put: 
Price 
.6550 
.5850 
6.40 
4.25 
715 
Time Value 
Premium 
0.90 
0.75 
The differential in futures prices is .07, or 7 cents per gallon. He thinks it could 
grow to 12 cents or so by early winter. However, he also thinks that oil and oil prod­
ucts have the potential to be very volatile, so he considers using the options. One cent 
is worth $420 for each of these items. 
The time value premium of the options is 1.65 for the put and call combined. If 
he pays this amount ($693) per combination, he can still make money if the futures 
widen by 5.00 points, as he expects. Moreover, the option spread gives him the 
potential for profits if oil products are volatile, even if he is wrong about the futures 
relationship. 
Therefore, he decides to buy five combinations: 
Position 
Buy 5 January heating oil 60 calls @ 6.40 
Buy 5 January unleaded 62 puts @ 4.25 
Total cost: 
Cost 
$13,440 
8,925 
$22,365 
This initial cost is substantially larger than the initial margin requirement for 
five futures spreads, which would be about $7,000. Moreover, the option cost must 
be paid for in cash, while the futures requirement could be taken care of with 
Treasury bills, which continue to earn money for the spreader. Still, the strategist 
believes that the option position has more potential, so he establishes it. 
Notice that in this analysis, the strategist compared his time value premium cost 
to the profit potential he expected from the futures spread itself This is often a good 
way to evaluate whether or not to use options or futures. In this example, he thought 
that, even if futures prices remained relatively unchanged, thereby wasting away his 
time premium, he could still make money - as long as he was correct about heating 
oil outperforming unleaded gasoline. 
Some follow-up actions will now be examined. If the futures rally, the position 
becomes long. Some profit might have accrued, but the whole position is subject to 
losses if the futures fall in price. The strategist can calculate the extent to which his