Otapter 34: Futures and Futures Options 683 
This profit table shows that selling the August 625 call at 19 and buying the 
August 625 put at 31 is equivalent to - that is, it has the same profit potential as -
selling the August future at 613. So, if one buys the put and sells the call, he will 
effectively have sold his future at 613 and taken his loss. 
His resultant position after buying the put and selling the call would be a con­
version (long futures, long put, and short call). The margin required for a conversion 
or reversal is zero in the futures market. The margin rules recognize the riskless 
nature of such a strategy. Thus, any excess money that he has after paying for the 
unrealized loss in the futures will be freed up for new trades. 
The futures trader does not have to completely hedge off his position ifhe does 
not want to. He might decide to just buy a put to limit the downside risk. 
Unfortunately, to do so after the futures are already locked limit down may be too lit­
tle, too late. There are many kinds of partial hedges that he could establish - buy 
some puts, sell some calls, utilize different strikes, etc. 
The same or similar strategies could be used by a naked option seller who can­
not hedge his position because it is up the limit. He could also utilize options that are 
still in free trading to create a synthetic futures position. 
Futures options generally have enough out-of-the-money striking prices listed 
that some of them will still be free trading, even if the futures are up or down the 
limit. This fact is a boon to anyone who has a losing position that has moved the daily 
trading limit. Knowing how to use just this one option trading strategy should be a 
worthwhile benefit to many futures traders. 
COMMONPLACE MISPRICING STRATEGIES 
Futures options are sometimes prone to severe mispricing. Of course, any product's 
options may be subject to mispricing from time to time. However, it seems to appear 
in futures options more often than it does in stock options. The following discussion 
of strategies concentrates on a specific pattern of futures options mispricing that 
occurs with relative frequency. It generally m{inifests itself in that out-of-the-money 
puts are too cheap, and out-of-the-money calls are too expensive. The proper term 
for this phenomenon is "volatility skewing" and it is discussed further in Chapter 36 
on advanced concepts. In this chapter, we concentrate on how to spot it and how to 
attempt to profit from it. 
Occasionally, stock options exhibit this trait to a certain extent. Generally, it 
occurs in stocks when speculators have it in their minds that a stock is going to expe­
rience a sudden, substantial rise in price. They then bid up the out-of-the-money 
calls, particularly the near-term ones, as they attempt to capitalize on their bullish 
expectations. When takeover rumors abound, stock options display this mispricing