Options Strategies

Strategy Number 6 - Short Futures Contract

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

Put 100 $1,000
Strategy name:

Short "Futures Contract"

 

Recommended use of strategy

Expectation of a decrease in DJ Index. This is an alternative to selling shares.

Strategy components

  1. Writing a Short Call option at a strike price equal to the DJ Index.
  2. Purchasing a Long Put option at a strike price equal to the DJ Index.     

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

 

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

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.

 

Auxiliary table for building the profit line

 

DJ Index
(Horizontal axis)
(Fixed expenses)/ fixed income Variable expenses
(Call contribution)
Variable income (Put contribution) Total profit / (loss) 
(Vertical axis)
2+3+4
1 2 3 4 5
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 Put option.

Source of loss           

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

Break-even point     

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

Comment                  

The following explanation is for those of you who are familiar with the term "Short" ("Selling Short"). This strategy is the same as shorting on the DJ Index.

That is:                     

At any level of the index our profit (or loss) from the strategy will be equal to the profit (loss) from selling the DJ Index basket (the "basket") of shares short.

Example:                   

Let us assume that the DJ Index at the end of the period stands at 150 points. For selling the "basket" at the start date (when the index stood at 100 points) we receive $10,000 (100 points X $100). For purchasing the "basket" at index 150 points, we would pay $15,000, and make a loss totaling $5,000. This is the exact amount appearing in column 5 of the auxiliary table, next to 150 points in column 1.

Strategy Number 6 - Short Futures Contract562Strategy Number 6 - Short Futures Contract