Chapter 35: Futures Option Strategies for Futures Spreads 717 
Example: The strategist decides that, since his goal was for the futures spread to 
widen to 12 cents, he will not remove the position when the spread is only 8 cents, 
as it is now. However, he wants to take some action to protect his current profit, while 
still retaining the possibility to have the profit expand. 
As a first step, the equivalent futures position (EFP) is calculated. The pertinent 
data is shown in Table 35-5. 
TABLE 35-5. 
EFP of long combination. 
Future or Option 
January heating oil futures: 
January unleaded gasoline futures: 
January heating oil 60 call: Long 5 
January unleaded gas 62 put: Long 5 
Price 
.7100 
.6300 
11.05 
1.50 
Delta 
0.99 
-0.40 
EFP 
+4.95 
-2.00 
Total EFP: +2.95 
Overall, the position is long the equivalent of about three futures contracts. The 
position's profitability is mostly related to whether the futures rise or fall in price, not 
to how the spread between heating oil futures and unleaded gas futures behaves. 
The strategist could easily neutralize the long delta by selling three contracts. 
This would leave room for more profits if prices continue to rise ( there are still two 
extra long calls). It would also provide downside protection if prices suddenly drop, 
since the 5 long puts plus the 3 short futures would offset any loss in the 5 in-the­
money calls. 
Which futures should the strategist short? That depends on how confident he is 
in his original analysis of the intermarket spread widening. If he still thinks it will 
widen further, then he should sell unleaded gasoline futures against the deeply in­
the-money heating oil calls. This would give him an additional profit or loss opportu­
nity based on the relationship of the two oil products. However, ifhe decides that the 
intermarket spread should have widened more than this by now, perhaps he will just 
sell 3 heating oil futures as a direct hedge against the heating oil calls. 
Once one finds himself in a profitable situation, as in the above example, the 
rrwst conservative course is to hedge the in-the-rrwney option with its own underly­
ing future. This action lessens the further dependency of the profits on the inter­
market spread. There is still profit potential remaining from futures price action. 
Furthermore, if the futures should fall so far that both options return to in-the­
money status, then the intermarket spread comes back into play. Thus, in the above