491
OPTION TrAdINg STrATegIeS
Comment.  Once again, this strategy requires little explanation and is included primarily for com-
parison to other strategies. As any trader knows, the short futures position is appropriate when one 
is expecting a signifi  cant price decline. However, as will be seen later in this chapter, for any given 
expected price scenario, some option-based strategy will often off  er a more attractive trading oppor-
tunity in terms of reward/risk characteristics.   
 Strategy 3a: Long Call (at-the-Money) 
exAMPle . Buy August  $1,200  gold futures call at a premium of $38.80/oz ($3,880), with August gold 
futures trading at $1,200/oz. (See Table   35.3   a and Figure   35.3   a.)   
Comment.  The long call is a bullish strategy in which maximum risk is limited to the premium paid 
for the option, while maximum gain is theoretically unlimited. However, the probability of a loss is 
greater than the probability of a gain, since the futures price must rise by an amount exceeding the 
option premium (as of the option expiration) in order for the call buyer to realize a profi  t. Two spe-
cifi  c characteristics of the at-the-money option are the following: 
   1.  The maximum loss will only be realized if futures are trading at or below their current level at 
the time of the option expiration. 
   2.  For small price changes, each $1 change in the futures price will result in approximately a $0.50 
change in the option price. (At-the-money options near expiration, which will change by a 
greater amount, are an exception.) Thus, for small price changes, a net long futures position is 
equivalent to approximately two call options in terms of risk.     
    FIGURE   35.2    Profi  t/loss Profi  le: Short Futures 
Price of August gold futures at option expiration ($/oz)
1,000 1,050 1,100 1,150 1,200 1,250 1,300 1,350 1,400
Profit/loss at expiration ($)
20,000
15,000
10,000
5,000
−5,000
−10,000
−15,000
−20,000
0