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A Complete Guide to the Futures mArket
hedging applications
The entire discussion in this chapter has been approached from the vantage point of the speculator. 
However, option-based strategies can also be employed by the hedger. T o illustrate how options can be 
used by the hedger, we compare five basic alternative strategies for the gold jeweler who anticipates a 
requirement for 100 ounces of gold in August. The assumed date in this illustration is April 13, 2015, 
a day on which the relevant price quotes were as follows: spot gold = $1,198.90, August gold futures 
= $1,200, August $1,200 gold call premium = $38.80, August $1,200 gold put premium = $38.70. 
The five purchasing alternatives are:
5
 1. Wait until time of requirement. In this approach, the jeweler simply waits until August 
before purchasing the gold. In effect, the jeweler gambles on the interim price movement of 
gold. If gold prices decline, he will be better off. However, if gold prices rise, his purchase price 
will increase. If the jeweler has forward-contracted for his products, he may need to lock in his 
raw material purchase costs in order to guarantee a satisfactory profit margin. Consequently, the 
price risk inherent in this approach may be unacceptable.
tabLe 35.28  probability-W eighted profit/Loss ratio Comparisons for “Neutral/V olatile” expected 
probability Distribution
Long Straddle Short Straddle
price range 
($/oz)
average 
price ($/oz)
assumed 
probability
Gain/Loss at 
average price ($)
probability- 
W eighted 
Gain/Loss ($)
Gain/Loss at 
average price ($)
probability- 
W eighted 
Gain/Loss ($)
950–999.9 975 0.05 14,750 738 –14,750 –738
1,000–1,049.9 1,025 0.08 9,750 780 –9,750 –780
1,050–1,099.9 1,075 0.1 4,750 475 –4,750 –475
1,100–1,149.9 1,125 0.12 –250 –30 250 30
1,150–1,199.9 1,175 0.15 –5,250 –788 5,250 788
1,200–1,249.9 1,225 0.15 –5,250 –788 5,250 788
1,250–1,299.9 1,275 0.12 –250 –30 250 30
1,300–1,349.9 1,325 0.1 4,750 475 –4,750 –475
1,350–1,399.9 1,375 0.08 9,750 780 –9,750 –780
1,400–1,449.9 1,425 0.05 14,750 738 –14,750 –738
Probability-weighted profit/loss ratio: 3,985/1,635 = 2.44 1,635/3,985 = 0.41
5 There is no intention to imply that the following list of alternative hedging strategies is all-inclusive. Many other 
option-based strategies are also possible. For example, the jeweler could buy a call and sell a put at the same 
strike price—a strategy similar to buying a futures contract (see Strategy 15).