520A COMPleTe gUIde TO THe FUTUreS MArKeT
 Strategy 11a: Option-protected Long Futures (Long Futures + Long 
at-the-Money put) 
example . Buy August gold futures at $1,200/oz and simultaneously buy an August $1200 gold put at 
a premium of $38.70/oz ($3,870). (See Table   35.11   a and Figure   35.11   a.)   
Comment.  A frequently recommended strategy is that the trader implementing (or holding) a long 
futures position can consider buying a put to protect his downside risk. The basic idea is that if the 
market declines, the losses in the long futures position will be off  set dollar for dollar by the long put 
position. Although this premise is true, it should be stressed that such a combined position represents 
nothing more than a proxy for a long call. The reader can verify the virtually identical nature of these 
two alternative strategies by comparing Figure   35.11  a to Figure   35.3  a. If prices increase, the long 
futures position will gain, while the option will expire worthless. On the other hand, if prices decline, 
the loss in the combined position will equal the premium paid for the put. In fact, if the call and put 
premiums are equal, a long futures plus long put position will be precisely equivalent to a long call. 
 In most cases, the trader who fi  nds the profi  t/loss profi  le of this strategy attractive would be better 
off   buying a call, because the transaction costs are likely to be lower. However, if the trader already 
holds a long futures position, buying a put may be a reasonable alternative to liquidating this position 
and buying a call.   
Price of August gold futures at option expiration ($/oz)
Futures price at
time of position
initiation and
strike price
Breakeven price = $1,180.65
Profit/loss at expiration ($)
1,000
37,500
50,000
25,000
−25,000
−37,500
12,500
−12,500
0
1,050 1,100 1,150 1,200 1,250 1,300 1,350 1,400
Short 2 futures
Short futures + long put
    FIGURE   35.10    Profi  t/loss Profi  le: Bearish “T exas Option Hedge” (Short Futures + long Put)