Futures & Options

Strategy Guide
Table of Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
1. Long Futures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2. Short Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
3. Synthetic Long Futures (Split-Strike) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
4. Synthetic Short Futures (Split-Strike) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
5. Long Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
6. Short Call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
7. Long Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
8. Short Put . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
9. Bull Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
10. Bear Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
11. Long Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
12. Short Butterfly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
13. Long Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
14. Short Straddle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
15. Long Strangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
16. Short Strangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
17. Ratio Call Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
18. Ratio Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
19. Call Ratio Backspread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
20. Put Ratio Backspread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
21. Box or Conversion/Reversal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68
22. Ratio Put Spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
23. Call Ratio Backspread. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
24. Put Ratio Backspread. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
25. Box or Conversion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

Futures & Options Strategy Guide I 2

Introduction
Using futures and options, whether separately or in combination, can offer countless
trading opportunities. The 25 strategies in this publication are not intended to provide a
complete guide to every possible trading strategy, but rather a starting point. Whether
the contents will prove to be the best strategies and follow-up steps for you will depend
on your knowledge of the market, your risk-carrying ability, and your trading objectives.

Whether you’re looking for new trading opportunities or a capital efficient way to manage
portfolio risk, futures and options on futures offer a wide array of products to accomplish
either objective. Interested in learning more about futures? Visit our CME Group
Resource Center where you can find out why traders come to the futures markets,
explore the advantages of options on futures, view information on CME Group products
and access futures trading insights from industry experts.

The contents of this guide is courtesy of CME Group.

Futures & Options Strategy Guide I 3

How to Use This Guide
This publication was designed not as a complete
guide to every possible scenario, but rather as
an easy-to-use manual that suggests possible
trading strategies. One way to use it effectively
is to follow these simple steps:

1. Determine Your Market Outlook. Are you

generally bullish, bearish, or undecided on
future market moves?

2. Determine Your Volatility Outlook.

Do you feel that volatility will rise, fall, or
are you undecided?

By further analyzing your

3. Look Up the Corresponding Strategy
on the Appropriate Table. Whether you are
market and volatility outlook,
initiating a position or trying to follow up on you should be able to select
a current position, line up the correct row the option strike that provides
and column on the proper table to find a the best opportunity.
strategy that will help you make the most
of your outlook.

4. Determine the “Best” Strike Price. By

further analyzing your market and
volatility outlook, you should be able to
select the option strike that provides
the best opportunity.

Futures & Options Strategy Guide I 4

The follow-up strategies in this guide are usually “One Trade” changes. In other words,
we asked: “How can a trader transform a position into a more desirable position with
just one trade?” We did, however, bend this rule a little when one trade produced no
acceptable strategy.

Although you may be able to transform a trade with just one transaction, the resulting
position can contain options at strikes that may or may not be appropriate for your
new outlook.

The ratio spreads and ratio backspreads are strategies that do not fit neatly into one
of the nine scenarios. Therefore, a trader MUST analyze these strategies in greater
depth. The strikes chosen bear greatly on the resulting profit/loss. Consider several
“What-If ” scenarios before using these strategies.

There are many other strategies, such as calendar spreads, condors, Christmas
trees, and option strips, that are not addressed here. While they are all valid
strategies, they do not fit neatly into this approach.

The suggested strategies on the following pages are just that—suggestions.

Because of limited space, the strategies suggested may or may not the “best”
ones for your trading plan.

Futures & Options Strategy Guide I 5

How to Use the Tables
On the next page is a table suggesting strategies to use when “Initiating a Market
Position.” Let’s go through an example: a trader has been watching a major increase
in the value of the S&P 500® futures contract and feels the market is poised for a
minor downward move. This trader’s outlook is a small market drop with volatility
dropping and futures leveling off.

1. The market scenario is bearish.

2. The trader looks across the top of the page and finds “bearish”.
3. The volatility scenario is down.
4. The trader looks down the left of the page and finds “volatility falling”.
5. The trader lines up the bearish colum with the volatility falling row and finds two
possible suggested market scenarios:
6. Number 6, short call, and Number 18, ratio put spread.
7. The trader now does a number of “What-If” scenarios to determine the best strike,
the profit objective, and loss tolerance before making any trading decisions.

Futures & Options Strategy Guide I 6

Initiating a Market Position

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Buy a call Buy a put Buy a call

and a put at
same strike

19*. 20*. 15.

Call ratio Put ratio Long
Backspread Backspread Strangle

Sell a call and Sell a put and Buy a call

buy two higher buy two lower and a put at
strike calls strike puts different strikes

Volatility 8. 6. 14.
Short Short Short
Falling Put Call Straddle

Sell a put Sell a call Sell a call

And a put at
same strike

17*. 18*. 16.

Ratio call Ratio put Short
Spread Spread Strangle

Buy a call and Buy a put and Sell a call and

sell two higher sell two lower sell a put at
strike calls strike puts different strikes

Volatility 1. 2. 21.
Long Short Box/
Undecided Futures Futures Conversion

Buy a futures Sell a futures Use one of the

many combinations
of futures and options
that take advantage of
9. 10. mispricing to lock in a profit
Bull Bear
Spread Spread

Buy a call and Buy a put and

sell a call at a higher sell a put at a
strike OR buy a put and lower strike OR buy a call
sell a put at a higher rate and sell a call at a lower rate

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 7

1. Long Futures
Scenario
This trader feels that Live Cattle futures are poised for a rally. The implied volatility of the options
is relatively high, but the trader does not expect it to come down soon. Therefore, he decides to
buy one futures contract.

(1 Long April Live Cattle Futures)

5.0
4.0
3.0
2.0
1.0
Profit/Loss

0.0
-1.0
-2.0
-3.0
-4.0
-5.0
68 69 70 71 72 73 74 75 76 77 78

April Live Cattle Futures

Changes in implied volatility have no effect on this position.

If the trader has an opinion on volatility, he may consider
another strategy.

Futures & Options Strategy Guide I 8

 Specifics
Underlying Futures Contract: April Live Cattle

Futures Price Level: 73.00

Days to Futures Expiration: 75

Days to Options Expiration: 55

Option Implied Volatility: 16.2%

Position: Long 1 Futures

At Expiration
Breakeven: 73.00 (original futures price)*

Loss Risk: Unlimited; losses increase as

futures fall.

Potential Gain: Unlimited; profits increase as

futures rise.

*Example only, does not include commissions or fees

Things to watch
Changes in implied volatility have no effect on this position. If the trader has an opinion on
volatility, he may consider another strategy. Another strategy may increase potential profits and/
or reduce potential losses. Check the next page for suggested follow-up strategies.

Futures & Options Strategy Guide I 9

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Buy A Put Liquidate Futures Buy Two Puts

And Buy A Put

20*.
Put Ratio
Backspread

Sell A Call And

Buy Two Puts At
A Lower Strike

Volatility 8. 6. 14.
Short Short Short
Falling Put Call Straddle

Sell A Call Liquidate Futures Sell Two Calls

And Sell A Call

18*.
Ratio Put
Spread

Sell Two Calls

And Buy A Call At
A Higher Rate

1. 2. Liquidate Position
Volatility
Long Short
Undecided Futures Futures

Hold On Sell Two Futures

(One Liquidates
Original Position)

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 10

2. Short Futures
Scenario
This trader is a technician. He sees a major turnaround in the price of Euro FX Futures. He points
out that the chart patterns suggest a big downward move, the short-term moving average
crossed under the longterm moving average, and even the fundamentals look bearish. He has
looked at the options market, but feels that a short futures position would be the best.

(1 Short September Euro FX Futures)

5.0
4.0
3.0
2.0
1.0
Profit/Loss

0.0
-1.0
-2.0
-3.0
-4.0
-5.0
.96 .97 .98 .99 1.00 1.01 1.02 1.03 1.04 1.05 1.06

September Euro FX Fixtures

Futures & Options Strategy Guide I 11

 Specifics
Underlying Futures Contract: September Euro FX

Futures Price Level: 1.0100

Days to Futures Expiration: 65

Days to Options Expiration: 55

Option Implied Volatility: 14.9%

Open Position: Short 1 Futures

At Expiration
Breakeven: 1.0100 (original futures price)*

Loss Risk: Unlimited; losses increase as

futures rise.

Potential Gain: Unlimited; profits increase as

futures fall.

*Example only, does not include commissions or fees

Things to watch
Implied volatility has no effect on this position. If the trader has an opinion on volatility, he may
consider another strategy. Other strategies may increase the reward and/or reduce the risk.
Check the following page for follow-up strategies.

Futures & Options Strategy Guide I 12

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Liquidate Futures Buy A Call Buy Two Calls

And Buy A Call

19*.
Call Ratio
Backspread

Sell A Put And

Buy Two Calls
At A Higher Strike

Volatility 8. 6. 14.
Short Short Short
Falling Put Call Straddle

Liquidate Sell A Put Sell Two Puts

Futures And Sell
A Put

17*.
Ratio Call
Spread

Sell Two Puts

And Buy A Put
At A Lower Strike

Liquidate Position
Volatility 1. 2.
Long Short
Undecided Futures Futures

Buy Two Futures Hold On

(One Liquidates
Original Position)

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 13

3. Synthetic Long Futures (Split-Strike)
Scenario
Normally a trader enters into this position only as a follow-up strategy. Suppose the trader has
a short strangle that he wants to convert to a long futures. He can buy two calls (one liquidates
the original short call). This nearly creates a synthetic long futures (long call, short put); however,
it does so at different strike prices. The only difference in the risk/reward profile is the flat area
between strikes—where little is gained or lost (depending upon the premiums and the exact
strikes chosen).

(1 Long Mar CD Call @ .6450; 1 Short Put @ .6350)

Current Expiration
2.0

1.5

1.0

0.5
Profit/Loss

-0.5

-1.0

-1.5

-2.0
61.5 62 62.5 63 63.5 64 64.5 65 65.5 66 66.5

March Canadian Dollar Futures

Futures & Options Strategy Guide I 14

 Specifics
Underlying Futures Contract: March Canadian Dollar

Futures Price Level: .6400

Days to Futures Expiration: 30

Days to Options Expiration: 20

Option Implied Volatility: 5.0%

Long 1 Mar .6450 Call – .0020 ($200)

Open Position: Short 1 Mar .6350 Put + .0019 ($190)
– .0001 ($ 10)

At Expiration
Breakeven: .6451 (.6450 strike + 0.0001 debit)*

Loss Risk: Unlimited; losses mount as futures fall past

.6350 strike.

Potential Gain: Unlimited; profits increase as futures rise

past .6451 breakeven.

*Example only, does not include commissions or fees

Things to watch
Implied volatility has no effect on this position. If the trader has an opinion on volatility, he may
consider another strategy. Other strategies may increase the reward and/or reduce the risk.
Check the following page for follow-up strategies.

Futures & Options Strategy Guide I 15

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 15.
Long Long Long
Rising Call Put Strangle

Liquidate Buy two puts Buy two puts

short put (one liquidates (one liquidates
original short original short put)
put) and liquidate
long call

Volatility 8. 6. 16.
Short Short Short
Falling Put Call Strangle
Liquidate Sell two calls Sell two calls
long call (one liquidates (one liquidates
original long call) original long
and liquidate call)
short put

Volatility 3. 10. Liquidate position

Synthetic Bear
Undecided Long Spread
Futures
(Split Sell a futures
Strike)

Hold on

Futures & Options Strategy Guide I 16

4. Synthetic Short Futures (Split-Strike)
Scenario
This trader feels that Eurodollar prices are going to drop (interest rates to rise). He has no opinion
on volatility. He considers a straight short futures, but decides that there is a slight chance that
Eurodollar futures will rise a little. He therefore to try a split-strike synthetic short futures position.

(1 Long Mar ED Put @ 92.50; 1 Short Call @ 92.75)

Current Expiration
1.2
1.0
0.8
0.6
0.4
0.2
Profit/Loss

0
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2

91.5 91.75 92 92.25 92.5 92.75 93 93.25 93.5 93.75 94

March EuroDollar Futures

Watch this position carefully; just like a short futures, this

position has unlimited risk.

Futures & Options Strategy Guide I 17

 Specifics
Underlying Futures Contract: March Eurodollar futures

Futures Price Level: 92.70

Days to Futures Expiration: 59

Days to Options Expiration: 40

Option Implied Volatility: 23.2%

Long 1 Mar 92.50 Putt – 0.14 ($ 350)

Open Position: Short 1 Mar 92.75 Call + 0.20 ($ 500)
+ 0.06 ($ 150)

At Expiration
Breakeven: 92.81 (92.75 strike + 0.06 credit)*

Loss Risk: Unlimited; losses mount above

92.81 breakeven.

Potential Gain: Unlimited; profits increase as futures

fall past 92.50 strike.

*Example only, does not include commissions or fees

Things to watch
Implied volatility changing normally has no effect on this strategy. Therefore, if the trader has
an opinion on volatility, he may find another strategy with a better risk/reward profile. Watch this
position carefully; just like a short futures, this position has unlimited risk. Check the next page for
follow-up strategies.

Futures & Options Strategy Guide I 18

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 15.
Long Long Long
Rising Call Put Strangle

Buy two calls Liquidate Buy two calls

(one liquidates short call (one liquidates
original short original short
call) and liquidate call)
long put

8. 6. 16.
Volatility
Short Short Short
Falling Put Call Strangle

sell two puts Liquidate Sell two puts

(one liquidates long put (one liquidates
original long original long put)
put) and liquidate
short call

Volatility 9. 4. Liquidate position

Bull Synthetic
Undecided Spread Short
Futures
Buy a futures (Split
Strike)

Hold on

Futures & Options Strategy Guide I 19

5. Long Call
Scenario
A trader projects that stock market futures are poised for a large upward move in a short period
of time. An increase in the underlying futures to 1315.00 or greater and an increase in implied
volatility by 4 percentage points also seem likely. Consequently, the trader decides to buy a call.

(1 Long Dec S&P 500 Call @905)

Current Expiration
20

15

10

5
Profit/Loss

-5

-10

-15

-20
875 880 885 890 895 900 905 910 915 920 925
March Canadian Dollar Futures

As soon as implied volatility rises to the expected

level, the trader may consider liquidating or
transforming this position.

Futures & Options Strategy Guide I 20

 Specifics
Underlying Futures Contract: December S&P 500

Futures Price Level: 900

Days to Futures Expiration: 25

Days to Options Expiration: 25

Option Implied Volatility: 18.1%

Open Position: Long 1 Dec 905 Call – 5.40 ($1350)

At Expiration
Breakeven: 910.40 (905 strike + 5.40 premium)*

Loss Risk: Below 910.40; with maximum

loss, at 905 or below, of 5.40.

Potential Gain: Unlimited; profits continue to increase as

futures rise above 910.40.

*Example only, does not include commissions or fees

Things to watch
The trader will lose the volatility effect if this position is held to expiration. As soon as implied
volatility rises to the expected level, the trader may consider liquidating or transforming this
position. Check the next page for appropriate follow-up strategies.

Futures & Options Strategy Guide I 21

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Hold on Sell a futures Buy a put at

same strike

15.
Long
Strangle

Buy a put at a
different stike

8. 6. 14.
Volatility Short Short Short
Falling Put Call Straddle

Liquidate Sell a call Sell two calls

long call and (one liquidates
sell a put original long call)
and sell a put at same strike

16.
Short
Strangle

Sell two calls

(one liquidates
original long call) and sell a put
at different strike

Volatility 9. 10. Liquidate position

Bull Bear
Undecided Spread Spread
Sell a higher Sell a lower
strike call strike call

1.
Long
Futures

Sell a put at
same strike

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 22

6. Short Call
Scenario
After a large increase, this trader now believes the Eurodollar market is in for a consolidation
and a mild downward fall. Implied volatility is approaching all-time highs. Premiums, therefore, are
relatively large. The trader wants to capture the inflated premium through the sale of one 92.00
call.

(1 Short Jun Eurodollar Call @ 92.00)

Current Expiration
1.0
0.8
0.6
0.4
0.2
Profit/Loss

0.0
-0.2
-0.4
-0.6
-0.8
-1.0
90.75 91 91.25 91.5 91.75 92 92.25 92.5 92.75 93 93.25

June Eurodollar Futures

Although the trader is highly compensated for the risk

assumed (with implied volatility high), the trader must
watch all unlimited risk positions closely.

Futures & Options Strategy Guide I 23

 Specifics
Underlying Futures Contract: June Eurodollar

Futures Price Level: 91.97

Days to Futures Expiration: 30

Days to Options Expiration: 30

Option Implied Volatility: 34.4%

Open Position: Short 1 Jun 92.00 Call + 0.30 ($750)

At Expiration
Breakeven: 92.30 (92.00 strike + 0.30 premium)*

Loss Risk: Unlimited; losses continue to increase as

futures rise above 92.30 breakeven.

Potential Gain: Limited to the premium received.

Maximum profit below 92.00 strike.

*Example only, does not include commissions or fees

Things to watch
Although the trader is highly compensated for the risk assumed (with implied volatility high), the
trader must watch all unlimited risk positions closely. Consider another strategy if the futures
and/or volatility continue to rise. A review of the trade should occur at some predetermined
place.

Futures & Options Strategy Guide I 24

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Buy two calls Liquidate short Buy two calls

(one liquidates call and (one liquidates
original short buy a put original short
call) call) and buy a put at same strike
20*. 15.
19*. Put Ratio Long
Call Ratio Backspread Strangle
Backspread
Buy a futures Buy two calls
Buy two higher and buy two (one liquidates
strike calls puts at a lower original short call)
strike and buy a put at a different strike

Volatility 8. 6. 14.
Short Short Short
Falling Put Call Straddle

Buy a futures Hold on Sell a put at

same strike

16.
Short
Strangle

Sell a put at
a different
strike

Volatility 1. 10. Liquidate position

Long Bear
Undecided Futures Spread
Buy a call at a Buy a call
lower strike at a higher
rate

2.
Short
Futures

Buy a put at
same strike

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 25

7. Long Put
Scenario
Pork Bellies have been trading at contract highs of between 75 and 85 cents per pound. The
trader feels that a major decline is very likely. However, the trader is not sure when it will come. He
decides to buy a long-term put option. By doing this, he initially has very little time decay. He can
ride out a temporary upward move and still be in for the big break.

(1 Long Feb Pork Belly Put @ 76.00)

Current Expiration
20

15

10

5
Profit/Loss

-5

-10

-15

-20
60 64 68 72 76 80 84 88 92 96 100

February Pork Belly Futures

Futures & Options Strategy Guide I 26

 Specifics
Underlying Futures Contract: February Pork Bellies

Futures Price Level: 80.15

Days to Futures Expiration: 210

Days to Options Expiration: 180

Option Implied Volatility: 33.2%

Open Position: Long 1 Feb 76 Put – 5.10 ($2040)

At Expiration
Breakeven: 70.90 (76.00 strike – 5.10 premium)*

Loss Risk: Limited to the premium paid. Loss

above 70.90 with maximum loss of
5.10 above 76.00.

Potential Gain: Unlimited, with profits increasing as

the futures fall further and further
past 70.90 breakeven.

*Example only, does not include commissions or fees

Things to watch
This trader must be very bearish, with volatility increasing, to make this trade profitable.
If held to expiration, the futures would have to fall more than 10% by expiration just to break
even. Check the follow-up strategies if the futures fall or volatility rises to the levels expected
before expiration.

Futures & Options Strategy Guide I 27

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Buy a futures Hold on Buy a call at

same strike

15.
Long
Strangle

Buy a call at
different strike

Volatility 8. 6. 14.
Short Short Short
Falling Put Call Straddle

Sell two puts Liquidate long Sell two puts

(one liquidates put and sell a (one liquidates
original long call original long put), and sell a call
put) at same strike
18*.
16.
Ratio Put
Short
Spread
Strangle
Sell two puts at Sell two puts
a lower strike (one liquidates
original long put), and sell a call
at a different rate

Volatility 9. 10. Liquidate position

Undecided Bull Bear
Spread Spread
Sell a put at Sell a put at
a higher strike a lower strike

2.
Short
Futures

Sell a call at
same stike

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 28

8. Short Put
Scenario
This trader feels very strongly that Australian Dollar futures will not fall. He thinks, though, that the
market has an equal chance of going up or leveling out. He also expects implied volatility to fall
about 11%. The trader decides to sell a put option.

(1 Short Mar Australian Dollar Put @ 0.5500)

Current Expiration
5.0
4.0
3.0
2.0
1.0
Profit/Loss

0.0
-1.0
-2.0
-3.0
-4.0
-5.0
50 51 52 53 54 55 56 57 58 59 60

March Australian Dollar Futures

Special consideration must be given to foreign currency

trading due to foreign and domestic central bank policy
changes.

Futures & Options Strategy Guide I 29

 Specifics
Underlying Futures Contract: March Australian Dollar

Futures Price Level: 0.5500

Days to Futures Expiration: 50

Days to Options Expiration: 40

Option Implied Volatility: 14.1%

Open Position: Short 1 Mar 0.5500 Put + .0111 ($1110)

At Expiration
Breakeven: 0.5389 (0.5500 strike – 0.0111 credit)*

Loss Risk: Unlimited, with losses increasing as futures

fall past 0.5389 breakeven.

Potential Gain: Limited to the premium received 0.0111

($1110). This occurs when futures is above
0.5500 strike at option expiration.

*Example only, does not include commissions or fees

Things to watch
As with all unlimited risk situations, the trader must watch this position carefully. Special
consideration must be given to foreign currency trading due to foreign and domestic central
bank policy changes. The worst scenario is to be in this position with volatility rising and futures
falling. Always reevaluate this position at some predetermined point.

Futures & Options Strategy Guide I 30

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Buy a put Liquidate Buy two puts

futures and
buy a put

20*.
Put Ratio
Backspread

Sell a call and

buy two puts
at a lower
strike

Volatility 8. 6. 14.
Short Short Short
Falling Put Call Straddle

Sell a call Liquidate Sell two calls

futures and
sell a call

18*.
Ratio Put
Spread

Sell two calls

and buy a call
as a higher strike

Volatility 1. 2. Liquidate position

Long Short
Undecided Futures Futures

Hold on Sell two futures

(one liquidates
original position)

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 31

9. Bull Spread
Scenario
The trader feels bullish on Lumber, but volatility is in question. He could try futures as an
alternative, but wants the comfort of a limited loss position. He decides on a bull spread
with the higher strike written at the top of his expected trading range of 210.

(1 Long Nov Lumber Call @ 200; 1 Short Call @ 210)

Current Expiration
10.0
8.0
6.0
4.0
2.0
Profit/Loss

0.0
-2.0
-4.0
-6.0
-8.0
-10.0
170 175 180 185 190 195 200 205 210 215 220

November Lumber Futures

Futures & Options Strategy Guide I 32

 Specifics
Underlying Futures Contract: November Lumber

Futures Price Level: 193.00

Days to Futures Expiration: 60

Days to Options Expiration: 40

Option Implied Volatility: 23.2%

Long 1 Nov 200 Call – 2.10 ($315)

Open Position: Short 1 Nov 210 Call + 0.50 ($ 75)
+ 0.06 ($ 150)

At Expiration
Breakeven: 201.60 (200.00 strike + 1.60 debit)*

Loss Risk: Limited to premium paid. Losses increase

below 201.60 to a maximum loss below
200.00 of 1.60 ($240).

Potential Gain: Limited to difference between strikes less

debit paid (10.00 – 1.60) 8.40 ($12,600). Gains
mount above 201.60 with maximum profit at
210.00.

*Example only, does not include commissions or fees

Things to watch
Volatility changes affect this spread very little. Therefore, if the trader has an opinion on volatility,
one of the other strategies may work better. Check the next page for follow-up strategies.

Futures & Options Strategy Guide I 33

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 12.
Long Long Short
Rising Call Put Butterfly

If bull spread If a bull spread Add a bear

is construced is constructed spread at
with calls then with puts then lower strikes
liquidate short call; if bull spread liquidate short put; if bull spread
is constructed with puts then is constructed with calls then
liquidate short put and buy liquidate short call and sell
futures futures

Volatility 8. 6. 11.
Short Short Long
Falling Put Call Butterfly

If bull spread If bull spread Add a bear

is constructed is constructed spread at
with puts then liquidate long with calls then liquidate long higher stakes
put; if bull spread is constructed call; if bull spread is constructed
with calls then liquidate long with puts then liquidate long
call and buy futures put and sell futures

Volatility 9. 4. Liquidate position

Bull Synthetic
Undecided Spread Short
Futures
Hold on (Split
Strike)

Sell a futures

Futures & Options Strategy Guide I 34

10. Bear Spread
Scenario
This trader is convinced the British Pound market is going to fall. The trader does not expect a
sharp drop, just a gradual decline to about 1.5600 US$/pound. He decides on a bear spread
with the written put at the target price.

(1 Long June BP Put @ 1.5800; 1 Short Put @ 1.5600)

Current Expiration
0.0300

0.0200

0.0100
Profit/Loss

0.0000

-0.0100

-0.0200

-0.0300

1.48 1.50 1.52 1.54 1.56 1.58 1.60 1.62 1.64 1.66 1.68

June British Pound Futures

Why should the trader pay for an option with unlimited potential
when he thinks the move is limited? Selling an option at the
target price will reduce the cost of an outright long option.

Futures & Options Strategy Guide I 35

 Specifics
Underlying Futures Contract: June British Pound

Futures Price Level: 1.5850

Days to Futures Expiration: 80

Days to Options Expiration: 70

Option Implied Volatility: 12.0%

Long 1 Jun 1.5800 Put – .0320 ($2000.00)

Position: Short 1 Jun 1.5600 Put + 0.50 ($ 75)
– 1.60 ($240)

At Expiration
Breakeven: 1.5690 (1.5800 strike – .0110 debit)*

Loss Risk: Losses start above 1.5690, but are limited

to the debit paid. Maximum loss above
1.5800.

Potential Gain: Gains mount as futures fall below 1.5690.

Maximum profit of .0090 ($562.50) at or
below 1.5600 (the difference between
strikes .0200 – debit .0110).

*Example only, does not include commissions or fees

Things to watch
If the trader had a target price in mind, this would be an effective strategy. Why should the trader
pay for an option with unlimited potential when he thinks the move is limited? Selling an option at
the target price will reduce the cost of an outright long option.

Futures & Options Strategy Guide I 36

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 12.
Long Long Short
Rising Call Put Butterfly

If bear spread If a bear Add a bull

is constructed spread is spread at
with calls then constructed higher strikes
liquidate short call; if bear with puts then liquidate short
spread is constructed with puts put; if bear spread is constructed
then liquidate short put and with calls then liquidate short
buy futures call and sell futures

Volatility 8. 6. 11.
Short Short Long
Falling Put Call Butterfly

If bear spread If bear spread Add a bull

is constructed is constructed spread at
with puts then with calls then lower stakes
liquidate long put; if bear spread liquidate long call; if bear spread
is constructed with calls then is constructed with puts then
liquidate long call and buy liquidate long put and sell
futures futures

Volatility 1. 10. Liquidate position

Long Bear
Undecided Futures Spread
Buy a futures Hold on

3.
Synthetic
Long
Futures
(Split
Strike)

Buy a futures

Futures & Options Strategy Guide I 37

11. Long Butterfly
Scenario
The trader currently has a #17 Ratio Call Spread. He thinks this is still a good position. However,
he is worried that the futures may increase dramatically on the upside, leaving him with a
substantial loss. He adds a long call and converts the position into a long butterfly.

(1 Long LHZ Call @ 52; 2 Short Calls @ 54; 1 Long Call @ 56)
Current Expiration
3

1
Profit/Loss

-1

-2

-3
59 50 51 52 53 54 55 56 57 58 59

December Lean Hog Futures

Selling an option at the target price will reduce the cost of

an outright long option.

Futures & Options Strategy Guide I 38

 Specifics
Underlying Futures Contract: December Lean Hogs

Futures Price Level: 52.50

Days to Futures Expiration: 74

Days to Options Expiration: 45

Option Implied Volatility: 21.5%

Long 1 Dec 52.00 Call – 1.825 ($547.50)

Short 2 Dec 54.00 Calls + 0.950 ($285.00)
Open Position:
Long 1 Dec 56.00 Call – 0.450 ($135.00)
– 0.375 ($112.50)

At Expiration

Downside: 52.375 (52.00 strike + 0.375

Breakeven: debit). Upside: 55.625 (56.00 strike – 0.375
debit).*

Loss Risk: Losses start above 55.625, or below 52.375,

but are limited to the debit paid. Maximum
loss above 56.00 strike or below 52.00
strike.

Potential Gain: Gains mount as futures fall below 1.5690.

Maximum profit of .0090 ($562.50) at or
below 1.5600 (the difference between
strikes .0200 – debit .0110).

*Example only, does not include commissions or fees

Things to watch
If the trader had a target price in mind, this would be an effective strategy. Why should the trader
pay for an option with unlimited potential when he thinks the move is limited? Selling an option at
the target price will reduce the cost of an outright long option.
Futures & Options Strategy Guide I 39
Follow-up Strategies

Bullish Bearish Undecided

5. 7. 15.
Volatility
Long Long Long
Rising Call Put Strangle

If the long If the long If the long

butterfly is butterfly is butterfly is
constructed constructed constructed
with calls, then liquidate all with puts, then liquidate all with two calls and two puts,
options but one long call options but one long put then liquidate the short call
and the short put

Volatility 8. 6. 11.
Short Short Long
Falling Put Call Butterfly

If the long If the long Hold on

butterfly is butterfly is
constructed with puts, then constructed with calls, then
liquidate all options but one liquidate all options but one
short put short call

Volatility 9. 10. Liquidate position

Bull Bear
Undecided Spread Spread
Liquidate a Liquidate a
bear spread bull spread

*It is very difficult to convert a butterfly into another strategy with one or even two transactions.
Normally, for off-floor-traders, this trade would not be entered into as transaction costs can be
substantial. Also, follow-up trades can add to commission costs, making it very difficult to realize
a profit.

Futures & Options Strategy Guide I 40

12. Short Butterfly
Scenario
This trader currently has a #19 Call Ratio Backspread, but now feels that the underlying futures
will not explode on the upside. Instead, the trader feels that the market has an equal chance of
going up or down, and thus converts the position into a short butterfly.

(1 Short SFM Call @ .69; 2 Long Calls @ .70; 1 Short Call @ .71)
Current Expiration
0.0200

0.0100
Profit/Loss

0.0000

-0.0100

-0.0200
.675 .68 .685 .69 .695 .70 .705 .71 .715 .72 .725

June Swiss Franc Futures

Futures & Options Strategy Guide I 41

 Specifics
Underlying Futures Contract: December Lean Hogs

Futures Price Level: 52.50

Days to Futures Expiration: 74

Days to Options Expiration: 45

Option Implied Volatility: 21.5%

Long 1 Dec 52.00 Call – 1.825 ($547.50)

Short 2 Dec 54.00 Calls + 0.950 ($285.00)
Open Position:
Long 1 Dec 56.00 Call – 0.450 ($135.00)
– 0.375 ($112.50)

At Expiration

Downside: 0.6924 (0.6900 strike + 0.0024

Breakeven: credit). Upside: 0.7076 (0.7100 strike – 0.0024
credit).*

Loss Risk: Losses bottom out at 0.7000 strike.

Maximum loss of 0.0076 ($950).

Potential Gain: Gains top out at original net credit of 0.0024

($300). This occurs when futures rise above
0.7100 strike or fall below 0.6900 strike.

*Example only, does not include commissions or fees

Things to watch
There is not much risk in this position. Volatility has little effect. You should avoid follow-up
strategies unless you are quite certain of a particular move. Nearly every follow-up to this
strategy requires more than one trade—possibly incurring large transaction costs.

Futures & Options Strategy Guide I 42

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 12.
Long Long Short
Rising Call Put Butterfly

If the short If the short Hold on

butterfly is butterfly is
constructed constructed
with calls, then liquidate all with puts, then liquidate all
options but one long call options but one long put

Volatility 8. 6. 16.
Short Short Short
Falling Put Call Strangle

If the short If the short If the short

butterfly is butterfly is butterfly is
constructed with puts, then constructed with calls, then constructed with two calls and
liquidate all options but one liquidate all options but one two puts, then liquidate the long
short put about call call and the long put

9. 10. Liquidate position

Volatility
Bull Bear
Undecided Spread Spread

Liquidate a Liquidate a
bear spread bull spread

*It is very difficult to convert a butterfly into another strategy with one or even two transactions.
Normally, for off-floor traders, this trade would not be entered into as transaction costs can be
substantial. Also, follow-up trades can add to commission costs, making it very difficult to realize
a profit.

Futures & Options Strategy Guide I 43

13. Long Straddle
Scenario
This trader looks at the low implied volatility and feels that options are relatively inexpensive.
The expectation here is that this market is poised for a big move. However, the trader is not
sure which way it will be. Therefore, a decision is made to buy both a call and a put.

(1 Long May Feeder Cattle Call @ 82; 1 Long Put @ 82)

Current Expiration
5
4
3
2
1
Profit/Loss

0
-1
-2
-3
-4
-5
77 78 79 80 81 82 83 84 85 86 87

May Feeder Cattle Futures

Futures & Options Strategy Guide I 44

 Specifics
Underlying Futures Contract: May Feeder Cattle

Futures Price Level: 81.00

Days to Futures Expiration: 20

Days to Options Expiration: 20

Option Implied Volatility: 8.4%

Long 1 May 82.00 Call – 0.25 ($110.00)

Open Position: Long 1 May 82.00 Put – 1.25 ($550.00)
– 1.50 ($660.00)

At Expiration

Downside: 80.50 (82.00 strike – 1.50 debit).

Breakeven:
Upside: 83.50 (82.00 strike + 1.50 debit).*

Loss Risk: Losses bottom out at 82.00 strike with

a maximum loss of 1.50 ($660).

Potential Gain: Unlimited; gains begin below 80.50

breakeven and increase as futures fall.
Also, gains increase as futures rise past
83.50 breakeven.

*Example only, does not include commissions or fees

Things to watch
This is primarily a volatility play. A trader enters into this position with no clear idea of market
direction, but a forecast of greater movement (risk) in the underlying futures.

Futures & Options Strategy Guide I 45

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Liquidate the Liquidate the Hold on

long put long call

Volatility 8. 6. 14.
Short Short Short
Falling Put Call Straddle

Liquidate long Liquidate long Sell two calls

call and sell put and sell (one liquidates
two puts two calls original long call) and sell two
(one liquidates original long put) (one liquidizes original long call) puts (one liquidates original
long put)

Volatility 1. 2. Liquidate position

Long Short
Undecided Futures Futures

Sell two puts Sell two calls

(one liquidates (one liquidates
original long put) original long
call)

Futures & Options Strategy Guide I 46

 14. Short Straddle
Scenario
This trader finds a market with relatively high implied volatility. The current feeling is that the
market will stabilize after having had a long run to its present level. To take advantage of time
decay and dropping volatility, this trader sells both a call and a put at the same strike price.

(1 Short Sep JY Call @ 0.8600; 1 Short Put @ 0.8600)

Current Expiration
0.0500
0.0400
0.0300
0.0200
0.0100
Profit/Loss

0.0000
-0.0100
-0.0200
-0.0300
-0.0400
-0.0500
.81 .82 .83 .84 .85 .86 .87 .88 .89 .90 .91

September Japanese Yen

Assignment of a futures position transforms this strategy into a

synthetic short call or synthetic short put.

Futures & Options Strategy Guide I 47

 Specifics
Underlying Futures Contract: September Japanese Yen

Futures Price Level: 0.8600

Days to Futures Expiration: 40

Days to Options Expiration: 30

Option Implied Volatility: 12.6%

Short 1 Sep 0.8600 Call + 0.0100 ($1250.00)

Open Position: Short 1 Sep 0.8600 Put + 0.0100 ($1250.00)
+ 0.0200 ($2500.00)

At Expiration
Downside: 0.8400 (0.8600 strike – 0.0200
Breakeven: credit). Upside: 0.8800 (0.8600 strike +
0.0200 credit).*

Loss Risk: Unlimited; losses increase as futures fall

below 0.8400 breakeven or rise above
0.8800 breakeven.

Potential Gain: Limited to credit received; maximum profit

of 0.0200 ($2500) achieved as position
is held to expiration and futures close at
exactly 0.8600 strike.

*Example only, does not include commissions or fees

Things to watch
This is primarily a volatility play. A trader enters into this position with no clear idea of market
direction, but a forecast of greater movement (risk) in the underlying futures. Be aware of early
exercise. Assignment of a futures position transforms this strategy into a synthetic short call or
synthetic short put.

Futures & Options Strategy Guide I 48

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Buy two calls Buy two puts Buy two calls

(one liquidates (one liquidates (one liquidates
original short original short original short
call) and liquidate short put put) and liquidate short call call) and buy two puts
(one liquidates original short put)

Volatility 8. 6. 14.
Short Short Short
Falling Put Call Straddle

Liquidate Liquidate Hold on

short call short put

Volatility 1. 2. Liquidate position

Long Short
Undecided Futures Futures

Buy two calls Buy two puts

(one liquidates (one liquidates
original short original short
call) put)

Futures & Options Strategy Guide I 49

15. Long Strangle
Scenario
This trader looks at the low implied volatility and feels that options are relatively cheap. The
thinking here is that this market will have a very big move. However, the trader is not sure which
way it will be, so he decides to buy both a call and a put. The trader saves on premiums by buying
both options out-of-the-money. However, the trader must get an even larger move than a long
straddle to make this strategy profitable by expiration.

(1 Long Dec EC Call @ 1.0200; 1 Long Put @ 1.0000)

Current Expiration
0.0500
0.0400
0.0300
0.0200
0.0100
Profit/Loss

0.0000
-0.0100
-0.0200
-0.0300
-0.0400
-0.0500
.96 .97 .98 .99 1.00 1.01 1.02 1.03 1.04 1.05 1.06

December Euro FX Futures

Futures & Options Strategy Guide I 50

 Specifics
Underlying Futures Contract: December Euro FX

Futures Price Level: 1.0100

Days to Futures Expiration: 65

Days to Options Expiration: 55

Option Implied Volatility: 11.3%

Long 1 Dec 1.0200 Call – 0.0500 ($ 625.00)

Open Position: Long 1 Dec 1.0000 Put – 0.0048 ($ 600.00)
– 0.0098 ($1225.00)

At Expiration
Downside: 0.5002 (1.0000 strike – 0.0098
Breakeven: debit). Upside: 1.0298 (1.0200 strike + 0.0098
debit).*

Loss Risk: Losses bottom out at 0.0098 with a

maximum loss between 1.0200 and 1.0000
strikes.

Potential Gain: Unlimited; gains begin below .9902 and

increase as futures fall. Also, gains increase
as futures rise past 1.0298.

*Example only, does not include commissions or fees

Things to watch
This is primarily a volatility play. A trader enters into this position with no clear idea of market
direction, but a forecast of greater movement in the underlying futures.

Futures & Options Strategy Guide I 51

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 15.
Long Long Long
Rising Call Put Strangle
Liquidate Liquidate Hold on
long put long call

Volatility 8. 6. 16.
Short Short Short
Falling Put Call Strangle

Sell two puts Sell two calls Sell two calls

(one liquidates (one liquidates (one liquidates
original long original long call) original long call)
put) and liquidate and liquidate and sell two puts (one
the long call the long put liquidates original long put)

Liquidate position
Volatility 3. 4.
Undecided Synthetic Synthetic
Long Short
Futures Futures
(Split (Split
Strike) Strike)

Sell two puts (one liquidates Sell two calls (one liquidates
original long put) original long call)

Futures & Options Strategy Guide I 52

16. Short Strangle
Scenario
This trader finds current implied volatility at relatively high levels. The expectation now is for a
very lackluster trading month with no trend and reduced volatility. The trader could sell a straddle,
but feels more comfortable with the wider range of maximum profit of the short strangle.

(1 Short Mar LB Call @ 200; 1 Short Put @ 170)

Current Expiration
10
8
6
4
2
Profit/Loss

0
-2
-4
-6
-8
-10
160 165 170 175 180 185 190 195 200 205 210

March Lumber Futures

Futures & Options Strategy Guide I 53

 Specifics
Underlying Futures Contract: March Lumber

Futures Price Level: 185.00

Days to Futures Expiration: 65

Days to Options Expiration: 45

Option Implied Volatility: 19.4%

Short 1 Mar 200.00 Call + 0.80 ($120.00)

Open Position: Short 1 Mar 170.00 Put + 0.60 ($ 90.00)
+ 1.40 ($210.00)

At Expiration
Downside: 168.60 (170.00 strike – 1.40 credit).
Breakeven:
Upside: 201.40 (200.00 strike + 1.40 credit).*

Loss Risk: Unlimited; losses continue to mount as

futures fall below 168.60 breakeven or
rise above 201.40 breakeven.

Potential Gain: Maximum gains occur between strikes

(a 30.00 range of maximum profit).

*Example only, does not include commissions or fees

Things to watch
There is a high probability that futures will expire in this range, thereby yielding the maximum
profit. However, the profit received is relatively small for the amount that could be at risk if
futures were to rally or drop sharply. Assignment of a futures position transforms this strategy
into a synthetic short call or synthetic short put.

Futures & Options Strategy Guide I 54

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 15.
Long Long Long
Rising Call Put Strangle

Buy two calls Buy two puts Buy two calls

(one liquidates (one liquidates (one liquidates
original short original short original short call)
call) and liquidate put) and liquidate and buy two puts (one
short put short call liquidates original short put)

Volatility 8. 6. 16.
Short Short Short
Falling Put Call Strangle
Liquidate Liquidate Hold on
short call short put

Volatility 3. 4. Liquidate position

Synthetic Synthetic
Undecided Long Short
Futures Futures
(Split (Split
Strike) Strike)

Buy two calls (one liquidates Buy two puts (one liquidates
original short call) original short put)

Futures & Options Strategy Guide I 55

17. Ratio Call Spread
Scenario
This trader finds current implied volatility at relatively high levels. Analysis of this market leads
this trader to conclude that British Pound futures will trend very slowly up to about $1.60/pound.
Also, there is a small chance that the pound may fall dramatically. The trader, therefore, likes the
risk/reward profile of the ratio call spread with this outlook.

(1 Long June BP Call @ 1.58; 2 Short Calls @ 1.60)

Current Expiration
0.0400

0.0300

0.0200

0.0100
Profit/Loss

0.0000

-0.0100

-0.0200

-0.0300

-0.0400
1.53 1.54 1.55 1.56 1.57 1.58 1.59 1.60 1.61 1.62 1.63

June British Pound Futures

Futures & Options Strategy Guide I 56

 Specifics
Underlying Futures Contract: June British Pound

Futures Price Level: 1.5800

Days to Futures Expiration: 35

Days to Options Expiration: 25

Option Implied Volatility: 14.1%

Long 1 Jun 1.5800 Call – 0.0232 ($1450.00)

Short 2 Jun 1.6000 Calls + 0.0146 ($ 912.50)
Open Position:
x2
+ 0.0060 ($ 375.00)

At Expiration
1.6260 (1.6000 strike + 0.02 difference
Breakeven:
between strikes + 0.0060 credit).*

Loss Risk: Unlimited; losses continue to mount as

futures rise above 1.6260.

Potential Gain: Maximum gain of 0.0260 ($1625.00) peaks

at 1.6000 strike.

*Example only, does not include commissions or fees

Things to watch
Do not enter into this position when there is a chance of an explosive upward move. In this
particular situation, a profit is realized if futures fall. However, depending on the strikes chosen,
a small loss may also occur.

Futures & Options Strategy Guide I 57

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Liquidate The Liquidate The Liquidate The

Two Short Calls Two Short Calls Two Short Calls
And Sell Futures And Buy A Put
At Same Strike As Original
Long Call

Volatility 17*. 6. 14.

Ratio Call Short Short
Falling Spread Call Straddle

Hold On Liquidate Long Sell A Put At

Call And Same Strike As
Liquidate One Original Long Call
Short Call

11.
Long
Butterfly

Buy A Call At An
Even Higher
Strike Than The Original Position

Volatility 9. 4. Liquidate Position

Bull Synthetic
Undecided Spread Short
Futures
Liquidate One (Split
Short Call Strike)

Liquidate One Short Call

And Sell Futures

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 58

18. Ratio Put Spread
Scenario
This trader feels that current implied volatility is at relatively high levels. The thinking here is that
the market should consolidate after its big drop. The trader now believes reduced volatility and a
slow downward drifting of price are likely. Consequently, an order to execute a ratio put spread is
placed with the broker.

(1 Long Feb LC Put @ 62; 2 Short Puts @ 60)

Current Expiration
3

1
Profit/Loss

-1

-2

-3
57 58 59 60 61 62 63 64 65 66 67

February Live Cattle Futures

A rally will produce a small gain or loss depending on the

strikes chosen.

Futures & Options Strategy Guide I 59

 Specifics
Underlying Futures Contract: February Live Cattle

Futures Price Level: 62.50

Days to Futures Expiration: 30

Days to Options Expiration: 20

Option Implied Volatility: 15.5%

Long 1 Feb 62.00 Put – 0.675 ($270.00)

Open Position:
Short 2 Feb 60.00 Puts + 0.150 ($ 60.00) x 2
Long 1 Dec 1.0000 Put
– 0.375 ($150.00)

At Expiration
58.375 (60.00 strike – difference between
Breakeven:
strikes + 0.375 debit).*

Loss Risk: Unlimited; losses continue to mount as

futures fall below 58.375.

Potential Gain: Maximum gain of 1.625 ($650) peaks at

60.00 strike.

*Example only, does not include commissions or fees

Things to watch
Be very sure that prices will not go into a sharp decline. However, if a slow drop is anticipated, this
may be a good strategy. A rally will produce a small gain or loss depending on the strikes chosen.

Futures & Options Strategy Guide I 60

Follow-up Strategies

Bullish Bearish Undecided

Volatility 5. 7. 13.
Long Long Long
Rising Call Put Straddle

Liquidate the Liquidate the Liquidate the

two short puts two short puts two short puts
and buy futures and buy a call
at same strike as original
long put

8. 18*. 14.
Volatility
Short Ratio Put Short
Falling Put Spread Straddle

Liquidate one Hold on Sell a call at

short put and strike of
liquidate original long put
long put

11.
Long
Butterfly

Buy a put at an
even lower
strike than the original position

Volatility 3. 10. Liquidate position

Synthetic Bear
Undecided Long Spread
Futures
(Split Liquidate one
Strike) short put

Liquidate one short put and

buy a futures

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 61

19. Call Ratio Backspread
Scenario
This trader notices the low implied volatility of the options. The expectation now is for the
Eurodollar market to rally, but the trader does not want to lose money if the market moves
the other way. A strategy that fits this outlook fairly well is the call ratio backspread.

(1 Long April Live Cattle Futures)

5.0
4.0
3.0
2.0
1.0
Profit/Loss

0.0
-1.0
-2.0
-3.0
-4.0
-5.0
68 69 70 71 72 73 74 75 76 77 78

April Live Cattle Futures

Increased volatility helps this position, so the trader wants

large upward price moves.

Futures & Options Strategy Guide I 62

 Specifics
Underlying Futures Contract: March Eurodollar

Futures Price Level: 90.00

Days to Futures Expiration: 60

Days to Options Expiration: 40

Option Implied Volatility: 14.6%

Short 1 Mar 90.00 Call + 0.19 ($475.00)

Open Position: Long 2 Mar 90.25 Calls – 0.09 ($225.00) x 2
+ 0.01 ($ 25.00)

At Expiration
90.49 (90.25 strike + 0.25 difference
Breakeven:
between strikes – 0.01 credit).*

Loss Risk: Limited to 0.24 ($600); occurs only at

90.25 strike.

Potential Gain: Unlimited; gains mount as futures rise

above the 90.49 breakeven point.

*Example only, does not include commissions or fees

Things to watch
The worst situation would be a slow drifting of the price up toward the strike of purchased calls.
Increased volatility helps this position, so the trader wants large upward price moves.

Futures & Options Strategy Guide I 63

Follow-up Strategies

Bullish Bearish Undecided

Volatility 19*. 20*. 13.

Call Ratio Put Ratio Long
Rising Backspread Backspread Straddle

Hold on Buy a put at Buy a put at

same strike as strike of
the short call original
and sell a call at an even short call
higher strike than the original
position 12.
Short
Butterfly

Sell a call at
aneven higher
strike than original position

8. 6. 14.
Volatility Short Short Short
Falling Put Call Straddle

Liquidate one Liquidate the Liquidate two

short put and two long calls long calls and
liquidate sell a put at same
long put strike as original short call

16.
Short
Strangle
Liquidate two
long calls and
sell a put at different strike
than the original short call

Volatility 3. 10. Liquidate position

Synthetic Bear
Undecided Long Spread
Futures
(Split Liquidate one
Strike) long call

Liquidate one long call and

buy a futures

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 64

20. Put Ratio Backspread
Scenario
The trader is getting very nervous about the stock market. He is sure that the market is
overvalued, but not sure when the break will occur. Additionally, the trader does not want to stand
in front of a runaway bull market. This trader is willing to NOT participate in upside gains in order
to be certain that the position will be held when the market drops dramatically. He consequently
enters into a put ratio backspread.

(1 Short Dec S&P 500 Put @ 930; 2 Long Puts @ 920)

Current Expiration
20

15

10

5
Profit/Loss

-5

-10

-15

-20
895 900 905 910 915 920 925 930 935 940 945
December S&P 500 Futures

Changes in implied volatility have no effect on this position.

If the trader has an opinion on volatility, he may consider
another strategy.

Futures & Options Strategy Guide I 65

 Specifics
Underlying Futures Contract: December S&P 500

Futures Price Level: 940

Days to Futures Expiration: 105

Days to Options Expiration: 105

Option Implied Volatility: 16.2%

Short 1 Dec 930 Put + 7.10 ($1775.00)

Open Position: Long 2 Dec 920 Puts – 4.00 ($1000.00) x 2
– 0.90 ($ 225.00)

At Expiration
909.10 (920.00 strike –10.00 difference
Breakeven:
between strikes – 0.90 debit).*

Loss Risk: Limited; losses bottom out at strike of long

puts. At 920.00, the maximum loss of 10.90
($2725.00) occurs.

Potential Gain: Unlimited; gains mount as futures fall past

909.10 breakeven.

*Example only, does not include commissions or fees

Things to watch
Depending on the exact strikes chosen, a trader could come away with a small gain or loss
if futures continued their rally. The worst scenario is to have a mild bear market with volatility
dropping.

Futures & Options Strategy Guide I 66

Follow-up Strategies

Bullish Bearish Undecided

19*. 20*. 13.

Volatility
Call Ratio Put Ratio Long
Rising Backspread Backspread Straddle

Buy A Call At Hold On Buy A Call At

Same Strike As Same Strike As
The Short Put Original Short
And Buy A Put At An Even Lower Put
Strike Than Original Position
12.
Short
Butterfly

Sell A Put At An
Even Lower Strike
Than Original Position

8. 6. 14.
Volatility Short Short Short
Falling Put Call Straddle

Liquidate Two Liquidate Two Liquidate Two

Long Puts Long Puts And Long Puts And
Sell Futures Sell A Call At Same Strike
As Original Short Puts

16.
Short
Strangle

Liquidate Two
Long Puts And
Sell A Call At Different Strike Than
The Original Short Put

Volatility 9. 4. Liquidate position

Bull Synthetic
Undecided Spread Short
Futures
Liquidate One (Split
Long Put Strike)

Liquidate One Long Put

And Sell Futures

*All ratio spreads and ratio backspreads need more analysis. These strategies do not fit neatly
into any of the nine market scenarios. Define your market expectation more closely and work out
examples with different market scenarios before choosing these strategies. Also, ratio strategies
are sometimes done at ratios other than one by two.

Futures & Options Strategy Guide I 67

21. Box or Conversion/Reversal
Scenario
This trader wants to take advantage of mispricing between futures and options. There are
many ways that combinations of futures and/or options can generate a locked-in profit from
mispricing. In this case, though, the synthetic long futures (long call + short put at same strike)
is cheaper than the underlying futures. This trader can buy the synthetic futures and sell the
actual futures to lock in a profit equal to the mispricing.

(1 Short Feb PB Futures; 1 Long Call @ 68; 1 Short Put @ 68)

Current Expiration
2

1
Profit/Loss

-1

-2
59 50 51 52 53 54 55 56 57 58 59

February Pork Belly Futures

Futures & Options Strategy Guide I 68

 Specifics
Underlying Futures Contract: February Pork Bellies

Futures Price Level: 68.30

Days to Futures Expiration: 35

Days to Options Expiration: 10

Option Implied Volatility: Call = 34%; Put 37.5%

Long 1 Feb 68 Call – 1.675 ($670.00)

Open Position: Short 1 Feb 68 Put + 1.550 ($620.00)
– 0.125 ($ 50.00)

Long Synthetic Futures: 68.125

Short 1 Feb Futures: 68.300

Locked-In Profit: +0.175 ($ 70.00)

*Example only, does not include commissions or fees

At Expiration
Profit is “locked in” with amount received equal to the 0.175 ($70) less commission costs.

Things to Watch
Rarely will the mispricing be great enough for off-floor traders to capitalize on it. Unwinding the
position can create problems if all of the positions are not liquidated at exactly the same time.
Also, be aware of the possible forced early assignment of the short option.

Futures & Options Strategy Guide I 69

22. Ratio Put Spread
When to use
This spread is usually entered when the market is near B and you expect the market to fall slightly
to moderately but see a potential for sharp rise. One of the most common option spreads, it is
seldom done more than 1:3 (two excess shorts) because of downside risk.

Profit characteristics
Maximum profit if the market is A at expiration = B - A - net cost of position (for put-vs.-put version).
Maximum profit if long option premium is less than premium collected from the sale of two or
more options = B - A + net credit of position.

Loss characteristics
Loss limited on upside (to net cost of position in put-vs.-put version, or no loss if position established
at a credit) but open-ended if market falls. Rate of loss, if market falls below strike price A, is
proportional to number of excess shorts in position.

Decay characteristics
Dependent on the net time value purchased or sold via this strategy. If more time value is sold
than bought, then time value decays work to the benefit of the holder.

Usually entered when

market is near B and you
expect market to fall slightly
to moderately, but see a
potential for sharp rise

Futures & Options Strategy Guide I 70

23. Call Ratio Backspread
When to use
This backspread is normally entered when market is near B and shows signs of increasing
activity with greater probability to upside.

Profit characteristics
Profit limited on downside (if net credit taken in when position was established) but open-ended
in rallying market.

Loss characteristics
Maximum loss is amount of B - A - initial credit (or B - A + initial debit), realized if market is at B at
expiration. This loss is less than for equivalent long straddle, the trade-off for sacrificing profit
potential on the downside.

Decay characteristics
Dependent on the net time value purchased or sold via this strategy. If more time value is sold
than bought, then time value decays work to the benefit of the holder.

This loss is less than for

equivalent long straddle,
the trade-off for sacrificing
profit potential on
the downside

Futures & Options Strategy Guide I 71

24. Put Ratio Backspread
When to use
This backspread is normally entered when market is near A and shows signs of increasing
activity with greater probability to downside (for example, if last major move was up, followed by
stagnation).

Profit characteristics
Profit limited on upside (to net credit taken in when position was established) but open-ended in
collapsing market.

Loss characteristics
Maximum loss, is amount of B - A - initial credit (or B - A + initial debit), realized if market is at A at
expiration. This loss is less than for the equivalent long straddle, the trade-off for sacrificing profit
potential on the upside.

Decay characteristics
Dependent on the net time value purchased or sold via this strategy. If more time value is sold
than bought, then time value decays work to the benefit of the holder.

Maximum loss is amount

of B - A - initial credit (or B - A
+ initial debit), realized if
market is at A
at expiration

Futures & Options Strategy Guide I 72

25. Box or Conversion
When to use
Occasionally, a market will get out of line enough to justify an initial entry into one of these
positions. However, they are most commonly used to “lock” all or part of a portfolio by buying
or selling to create the missing “legs” of the position. These are alternatives to closing out
positions at possibly unfavorable prices.

Long Box
Long a bull spread, long a bear spread—that is, long call A, short call B, long put B, short put A.
Value = B - A - net debit.

Short Box
Long call B, short call A, long put A, short put B. Value = net credit + (A - B).

Long-instrument conversion
Long instrument, long put A, short call A. Value = 0. “Price” = instrument + put – A – call.

Short-instrument conversion
Short instrument, long call A, short put A. Value = 0. “Price” = A + call – instrument – put.

Occasionally, a market will get out of line enough to justify an

initial entry into one of these positions

Futures & Options Strategy Guide I 73

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