714 Part V: Index Options and Futures 
calls more profitable than the loss in his puts. This is the advantage of using in-the­
money options instead of futures in futures spreading strategies. 
In fairness, it should be pointed out that if the futures prices had remained rel­
atively unchanged, the 0.12 points of time value premium ($300) could have been 
lost, while the futures spread may have been relatively unchanged. However, this 
does not alter the reasoning behind wanting to use this option strategy. 
Another consideration that might come into play is the margin required. Recall 
that the initial margin for implementing the TED spread was $400. However, if one 
uses the option strategy, he must pay for the options in full - $1,800 in the above 
example. This could conceivably be a deterrent to using the option strategy. Of 
course, if by investing $1,800, one can make money instead of losing money with the 
smaller investment, then the initial margin requirement is irrelevant. Therefore, the 
profit potential must be considered the more important factor. 
FOLLOW-UP CONSIDERATIONS 
When one uses long option combinations to implement a futures spread strategy, he 
may find that his position changes from a spread to more of an outright position. This 
would occur if the markets were volatile and one option became deeply in-the­
money, while the other one was nearly worthless. The TED spread example above 
showed how this could occur as the call wound up being worth 1.00, while the put 
was virtually worthless. 
As one side of the option spread goes out-of-the-money, the spread nature 
begins to disappear and a more outright position takes its place. One can use the 
deltas of the options in order to calculate just how much exposure he has at any one 
time. The following examples go through a series of analyses and trades that a strate­
gist might have to face. The first example concerns establishing an intermarket 
spread in oil products. 
Example: In late summer, a spreader decides to implement an intermarket spread. 
He projects that the coming winter may be severely cold; furthermore, he believes 
that gasoline prices are too high, being artificially buoyed by the summer tourist sea­
son, and the high prices are being carried into the future months by inefficient mar­
ket pricing. 
Therefore, he wants to buy heating oil futures or options and sell unleaded 
gasoline futures or options. He plans to be out of the trade, if possible, by early 
December, when the market should have discounted the facts about the winter. 
Therefore, he decides to look at January futures and options. The following prices 
exist: