Options Strategies

Strategy Number 5 - Long Futures Contract


Market dATA
DJ Index 100 points
Prices
Call 100 $1,000

Put 100 $1,000

Strategy name:

Long "Futures Contract"

Recommended use of strategy

Expectation of an increase in DJ Index. This is an alternative to buying shares.

Strategy components

  1. Purchase a Long Call option at a strike price equal to the DJ Index at the start date.
  2. Short Put option at a strike price equal to the DJ Index at the start date.

Example: Purchase a Long Call at a price of $1,000 and write a Short Put 100 option for which we receive $1,000. The strategy is known as a Long "Futures Contract" since this combination creates an obligation (contract) to buy the DJ Index at the exercise date at its current price (100 points - $10,000).

 

Expenses / Income from building the strategy (at start date)

The cost of the strategy in our example is $0. When there is no particular expectation on the part of the investors of an increase or decrease in the DJ Index (in other words the investors estimate that in the future there is an equal chance of a decrease or an increase in the DJ index), the Put and Call option prices with an strike price equal to the DJ Index will equal each other. In the following example we have assumed that the prices of the options are identical, in other words, the cost of the strategy is $0.

Strategy graph:

Auxiliary table for building the profit lin

 

DJ Index

(Horizontal axis)

(Fixed expense) / fixed income

Variable expenses

(Put contribution)

Variable income (Call contribution)

Total profit / (loss)

(Vertical axis)

2+3+4

Œ



Ž





50

$0

($5,000)

-

($5,000)

60

$0

($4,000)

-

($4,000)

70

$0

($3,000)

-

($3,000)

80

$0

($2,000)

-

($2,000)

90

$0

($1,000)

-

($1,000)

100

$0

-

-

$0

110

$0

-

$1,000

$1,000

120

$0

-

$2,000

$2,000

130

$0

-

$3,000

$3,000

140

$0

-

$4,000

$4,000

150

$0

-

$5,000

$5,000

 

Strategy analysis:

Source of profit

When the index goes up, the profit arises from the Call option.

Source of loss

When the index goes down, the loss arises from the writing of the Short Put.

Break-even point

When there are no losses from the Put option and no profits from the Call option. This occurs at index 100.

Additional points

If we were to have purchased the DJ Index basket of shares, at the start date (when the index was at 100 points), for $10,000 (the base asset price), our profit from the basket of shares as the index increases above 100 points, would be equal to profit obtained from the strategy. Likewise, our loss from the basket of shares, as the index falls below 100 points would be equal to the loss from the strategy.

Strategy Number 5 - Long Futures Contract551  Strategy Number 5 - Long Futures Contract