Chapter 35: Futures Option Strategies for Futures Spreads 
June T-bill 9450 calls: 0.32 
June Euro$ 9450 puts: 0.40 
713 
The TED spread, basis June, is currently at 0.60 (the difference in price of the 
two futures). Both futures have in-the-money options with only a small amount of 
time value premium in them. 
The June T-bill calls with a striking price of 94.50 are 0.25 in the money and are 
selling for 0.32. Their time value premium is only 0.07 points. Similarly, the June 
Eurodollar puts with a striking price of 94.50 are 0.35 in the money and are selling 
for 0.40. Hence, their time value premium is 0.05. 
Since the total time value premium - 0.12 ($300) - is small, the strategist 
decides that the option spread may have an advantage over the futures intermarket 
spread, so he establishes the following position: 
Buy one June T-bill call @ 0.40 
Buy one June Euro$ put @ 0.32 
Total cost: 
Cost 
$1,000 
$ 800 
$1,800 
Later, financial conditions in the world are very stable and the TED spread 
begins to shrink. However, at the same time, rates are being lowered in the United 
States, and T-bill and Eurodollar prices begin to rally substantially. In May, when the 
June T-bill options expire, the following prices exist: 
June T-bill futures: 95.50 
June Euro$ futures: 95.10 
June T-bill 9450 calls: 1.00 
June Euro$ 9450 puts: 0.01 
The TED spread has shrunk from 0.60 to only 0.40. Thus, any trader attempt­
ing to buy the TED spread using only futures would have lost $500 as the spread 
moved against him by 0.20. 
However, look at the option position. The options are now worth a combined 
value of 1.01 points ($2,525), and they were bought for 0.72 points ($1,800). Thus, 
the option strategy has turned a profit of $725, while the futures strategy would have 
lost money. 
Any traders who used this option strategy instead of using futures would have 
enjoyed profits, because as the Federal Reserve lowered rates time after time, the 
prices of both T-bills and Eurodollars rose far enough to make the option strategist's