Position

Buy a Call Option Spread & Sell a Put Option

Margin Requirement

Yes, pay the difference in premiums and post variable margin on the put similar to futures in a falling market

Advantages

• Establishes a Range of Protection from higher prices
• Some benefit to lower prices
• Cost is reduced by selling both call & put
• Flexible, offset at any time
• Least expensive option strategy alternative

Disadvantages

• Limited benefit from lower futures price (to put’s strike price)
• Protection limited to the higher call strike less the net cost
• Offsetting before expiration will change the cost & P/L (disadvantage in both a higher and lower market)

When to Apply

• If market outlook is neutral or perceived risk to higher and lower prices is balanced
• If minimum cost in strategy selection is a priority
• If unlimited protection from higher prices is unnecessary AND potential long futures position below the market is acceptable
• In a high volatility environment historically and/or seasonally

Potential Adjustment

• In a rising market, buy back short put option to capture decay in premium, roll up short call option to extend range of protection, and/or roll up long call to capture gain from increase in price
• In a falling market, buy back short call option, roll down short put option to extend opportunity to participate in lower prices, and/or roll down long call option to capture savings from drop in price

Position

Sell a Put Option, Buy a Call Option (Bullish Collar)

Margin Requirement

Yes, pay the difference in premiums and post variable margin on the put similar to futures in a falling market

Advantages

• Establishes a Maximum futures price
• Cost of Call is reduced by selling the Put
• Flexible, offset at any time

Disadvantages

• Limited benefit from lower futures price
• Capital expense of potential margin exposure
• Offsetting before expiration will change the cost & P/L (advantage in higher market, disadvantage in lower market)

When to Apply

• If market outlook is bullish, but flexibility to benefit from partial decline in prices is necessary or desirable
• If upside risk is undefined or hard to define
• In a neutral implied volatility environment
• To adjust a long call or call spread after a decline in price

Potential Adjustment

• In a rising market, buy back short put option to capture decay in premium, roll up long call option to capture gain from increase in price, and/or sell higher strike call option to generate additional credit
• In a falling market, roll down long call option to capture savings from drop in price and/or roll down short put option to extend range of opportunity to benefit from falling prices

Position

Sell a Put Option

Margin Requirement

Yes, must post variable margin similar to futures in a falling market

Advantages

• Lowers buying price in stable market
• Some upside protection
• Flexible, offset at any time

Disadvantages

• Can’t benefit from lower futures price
• Upside protection limited to premium sold
• Offsetting before expiration will change the cost & P/L (potential increased cost to buy back in a falling market)
• Capital expense of potential margin exposure

When to Apply

• In a stable market environment or when risk to both higher and lower prices perceived to be limited
• If strike price of short put option represents a target purchase price that fits into budget or operating margin
• In a high implied volatility environment historically and/or seasonally

Potential Adjustment

• In a rising market, buy back put option to capture decay in premium, and/or roll up short put option to generate additional credit
• In a falling market, roll down put option to lower strike price to extend range of opportunity to benefit from falling prices

Position

Buy a Call Option, Sell a Higher Strike Call Option

Margin Requirement

No, pay the difference in premiums

Advantages

• Establishes a Range of Protection from higher prices
• Cost is reduced by selling higher strike call
• Lower futures price may improve your buying price
• Flexible, offset at any time, receive remaining value

Disadvantages

• Premium paid in full at time of purchase
• Protection limited to the higher call strike less the cost
• Offsetting before expiration will change the cost & P/L (advantage in
  lower market, disadvantage in higher market)

When to Apply

• If market outlook is bearish
• If unlimited protection to higher prices is not necessary or if upside risk
  can be better defined or measured
• If flexibility is needed to participate in all lower prices
• If capital constraints require maximum pre-defined margin exposure
• As an adjustment to a long future, long call or long collar position after
  an increase in price
• If in a neutral implied volatility environment

Potential Adjustment

• In a rising market, roll-up short call to a higher strike price to extend
  range of protection, roll up long call option to capture gain from increase
  in price, and/or sell put option to create credit or help offset cost
• In a falling market, buy back short call option, roll down long call option
  to capture opportunity from decline in price and/or sell put option to
  create credit or help offset cost

Position

Buy a Call Option

Margin Requirement

No, pay premium

Advantages

• Maximum futures price is established
• Lower futures price may improve your buying price
• Flexible, offset at any time, receive remaining value
• Maximum flexibility for adjustments to both higher & lower prices

Disadvantages

• Premium paid in full at time of purchase. Can be substantial for ATM or ITM call option
• Most expensive option strategy alternative

When to Apply

• If upside risk is undefined or hard to define
• If flexibility to participate in all lower prices is necessary
• If capital constraints require maximum pre-defined margin exposure
• If low implied volatility environment historically and/or seasonally

Potential Adjustment

• In a rising market, roll call up to a higher strike, and/or sell higher strike call against position to help offset initial cost by creating a credit
• In a falling market, roll call down to a lower strike, and/or sell lower strike put against position to capture savings from drop in price

Position

Buy Futures

Margin Requirement

Yes, variable margin required as market moves lower

Advantages

• Futures price risk is eliminated (unlimited protection to higher price levels)
• No premium expense, only transaction costs
• Flexible, offset at any time

Disadvantages

• Lower futures price does not improve buying price
• Capital expense of potential margin exposure

When to Apply

• If futures price level fits into budget or operating margin (no flexibility is needed to participate in lower prices)
• If price outlook is bullish
• Lack of liquidity in option market to execute a flexible price strategy

Potential Adjustment

• In a rising market, replace long futures position with a long call option or call spread as market sentiment becomes less bullish
• In a falling market, protect long futures position by buying a put option or put spread to help reduce purchase price level set by futures