489
OPTION TrAdINg STrATegIeS
is that the profit/loss profile for strategies that include a net long options position will shift 
upward as the time reference point is further removed from the expiration date. The reason is 
that at expiration, options have only intrinsic value; at points prior to expiration, options also 
have time value. Thus, prior to expiration, the holder of an option could liquidate his position at 
a price above its intrinsic value—the liquidation value assumed in the profit/loss profile. Simi-
larly, the profit/loss profile would be shifted downward for the option writer (seller) at points 
in time prior to expiration. This is true since at such earlier junctures, the option writer would 
have to pay not only the intrinsic value but also the time value if he wanted to cover his position.
 4. It is important to keep in mind that a single option is equivalent to a smaller position size than a 
single futures contract (see section entitled “
delta—the Neutral Hedge ratio” in the previous 
chapter). Similarly, an out-of-the-money option is equivalent to a smaller position size than an 
in-the-money option. Thus, the trader should also consider the profit/loss profiles consisting 
of various multiples of each strategy. In any case, the preference of one strategy over another 
should be based entirely on the relationship between reward and risk rather than on the absolute 
profit (loss) levels. In other words, strategy preferences should be totally independent of posi-
tion size.
 5. Trading strategies are evaluated strictly from the perspective of the speculator. Hedging applica-
tions of option trading are discussed separately at the end of this chapter.
 ■ Profit/Loss Profiles for Key Trading Strategies
Strategy 1: Long Futures
exAMPle. Buy August gold futures at $1,200. (See Table 35.1 and Figure 35.1.)
Comment. The simple long position in futures does not require much explanation and is included 
primarily for purposes of comparison to other less familiar trading strategies. As every trader knows, 
the long futures position is appropriate when one expects a significant price advance. However, as will 
tabLe 35.1 profit/Loss Calculations: Long Futures
Futures price at expiration ($/oz) Futures price Change ($/oz) profit/Loss on position
1,000 –200 –$20,000
1,050 –150 –$15,000
1,100 –100 –$10,000
1,150 –50 –$5,000
1,200 0 $0
1,250 50 $5,000
1,300 100 $10,000
1,350 150 $15,000
1,400 200 $20,000