543
OPTION TrAdINg STrATegIeS
strategies. One critical point that must be emphasized regarding option spreads is that these 
strategies are normally subject to a major disadvantage: the transaction costs (commissions plus 
cumulative bid/asked spreads) for these trades are relatively large compared to the profit poten-
tial. This consideration means that the option spread trader must be right a large percentage of 
the time if he is to come out ahead of the game. The importance of this point cannot be overem -
phasized. In short, as a generalization, other option strategies will usually offer better trading 
opportunities.
Multiunit Strategies
The profit/loss profile can also be used to analyze multiple-unit option strategies. In fact, multiple-
unit option positions may often provide the more appropriate strategy for purposes of comparison. 
For example, as previously detailed, a long futures position is more volatile than a long or short call 
position. In fact, for small price changes, each $1 change in a futures price will only result in approxi-
mately a $0.50 change in the call price (the delta value for an at-the-money call is approximately 
equal to 0.5). As a result, in considering the alternatives of buying futures and buying calls, it probably 
makes more sense to compare the long futures position to two long calls (see Table 35.22) as opposed 
to one long call.
Figure 35.22 compares the strategies of long futures versus long two calls, which at the time of 
initiation are approximately equivalent in terms of delta values. Note this comparison indicates that 
the long futures position is preferable if prices change only moderately, but that the long two-call 
position will gain more if prices rise sharply, and lose less if prices decline sharply. In contrast, the 
comparison between long futures and a long one-call position would indicate that futures provide 
the better strategy in the event of a price advance of any magnitude (see Figure 35.3d). For most 
purposes, the comparison employing two long calls will be more meaningful because it comes much 
closer to matching the risk level implicit in the long futures position.
tabLe 35.22 profit/Loss Calculations: Long two at-the-Money Calls
(1) (2) (3) (4) (5)
Futures price at 
expiration ($/oz)
premium of august 
$1,200 Call ($/oz)
$ amount of total 
premium paid
Value of 2 Calls 
at expiration
profit/Loss on 
position [(4) − (3)]
1,000 38.8 $7,760 $0 –$7,760
1,050 38.8 $7,760 $0 –$7,760
1,100 38.8 $7,760 $0 –$7,760
1,150 38.8 $7,760 $0 –$7,760
1,200 38.8 $7,760 $0 –$7,760
1,250 38.8 $7,760 $10,000 $2,240
1,300 38.8 $7,760 $20,000 $12,240
1,350 38.8 $7,760 $30,000 $22,240
1,400 38.8 $7,760 $40,000 $32,240