Chapter 34: Futures and Futures Options 693 
The reader has seen these follow-up strategies earlier in the book. However, 
there is one new concept that is important: The mispricing continues to propagate 
itself no matter what the price of the underlying futures contract. The at-the-money 
options will always be about fairly priced; they will have the average implied volatility. 
Example: In the previous examples, January soybeans were trading at 583 and the 
implied volatility of the options with striking price 575 was 15%, while those with a 
600 strike were 17%. One could, therefore, conclude that the at-the-money January 
soybean options would exhibit an implied volatility of about 16%. 
This would still be true if beans were at 525 or 675. The mispricing of the other 
options would extend out from what is now the at-the-money strike. Table 34-3 shows 
what one might expect to see if January soybeans rose 75 cents in price, from 583 to 
658. 
Nate that the same mispricing properties exist in both the old and new situa­
tions: The puts that are 58 points out-of-the-money have an implied volatility of only 
12%, while the calls that are 92 points out-of-the-money have an implied volatility of 
23%. 
TABLE 34-3. 
Propagation of volatility skewing. 
Original Situation 
January beans: 583 
Implied 
Strike Volatility 
525 12% 
550 13% 
575 15% 
600 17% 
625 19% 
650 21% 
675 23% 
New Situation 
January beans: 658 
Strike 
600 
625 
650 
675 
700 
725 
750 
This example is not meant to infer that the volatility of an at-the-money soybean 
futures option will always be 16%. It could be anything, depending on the historical 
and implied volatility of the futures contract itself. However, the volatility skewing 
will still persist even if the futures rally or decline. 
This fact will affect how these strategies behave as the(linderlying futures con­
tract moves. It is a benefit to both strategies. First, look at the put backspread when 
the stock falls to the striking price of the purchased puts.