712 Part V: Index Options and Futures 
stitute for futures spreads - that is, using in-the-money options. If one buys in-the­
rnoney calls instead of buying futures, and buys in-the-money puts instead of selling 
futures, he can often create a position that has an advantage over the intramarket or 
intermarket futures spread. In-the-money options avoid most of the problems 
described in the two previous examples. There is no increase of risk, since the options 
are being bought, not sold. In addition, the amount of money spent on time value 
premium is small, since both options are in-the-money. In fact, one could buy them 
so far in the money as to virtually eliminate any expense for time value premium. 
However, that is not recommended, for it would negate the possible advantage of 
using moderately in-the-money options: If the underlyingfutures behave in a volatile 
manner, it might be possible for the option spread to make money, even if the futures 
spread does not behave as expected. 
In order to illustrate these points, the TED spread, an intermarket spread, will 
be used. Recall that in order to buy the TED spread, one would buy T-bill futures 
and sell an equal quantity of Eurodollar futures. 
Options exist on both T-bill futures and Eurodollar futures. If T-bill calls were 
bought instead of T-bill futures, and if Eurodollar puts were bought instead of sell­
ing Eurodollar futures, a similar position could be created that might have some 
advantages over buying the TED spread using futures. The advantage is that if T-bills 
and/or Eurodollars change in price by a large enough amount, the option strategist 
can make money, even if the TED spread itself does not cooperate. 
One might not think that short-term rates could be volatile enough to make this 
a worthwhile strategy. However, they can move substantially in a short period of time, 
especially if the Federal Reserve is active in lowering or raising rates. For example, 
suppose the Fed continues to lower rates and both T-bills and Eurodollars substan­
tially rise in price. Eventually, the puts that were purchased on the Eurodollars will 
become worthless, but the T-bill calls that are owned will continue to grow in value. 
Thus, one could make money, even if the TED spread was unchanged or shrunk, as 
long as short-term rates dropped far enough. 
Similarly, if rates were to rise instead, the option spread could make money as 
the puts gained in value (rising rates mean T-bills and Eurodollars will fall in price) 
and the calls eventually became worthless. 
Example: The following prices for June T-bill and Eurodollar futures and options 
exist in January. All of these products trade in units of 0.01, which is worth $25. So a 
whole point is worth $2,500. 
June T-bill futures: 94.75 
June Euro$ futures: 94.15