Position

Buy a Put Option Spread & Sell a Call Option

Margin Requirement

Yes, pay premium difference in premiums and post variable margin on the call similar to futures in a rising market

Advantages

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

Disadvantages

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

When to Apply

• If market outlook is neutral or perceived risk to lower and higher prices is balanced
• If minimum cost in strategy selection is a priority
• If unlimited protection from lower prices is unnecessary AND potential short futures position above 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 opportunity to participate in higher prices, and/or roll up long put option to capture benefit from increase in price
• In a falling market, buy back short call option to capture decay in premium, roll down short put option to extend range of protection to lower prices and/or roll down long put option to capture gain from drop in price

Position

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

Margin Requirement

Yes, pay the difference in premiums and post variable margin on the short call similar to futures in a rising market

Advantages

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

Disadvantages

• Limited benefit from higher futures price
• Capital expense of potential margin exposure
• 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, but flexibility to benefit from partial increase in prices is necessary or desirable
• If downside risk is undefined or hard to define
• In a neutral implied volatility environment
• To adjust a long put or put spread after an increase in price

Potential Adjustment

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

Position

Sell a Call Option

Margin Requirement

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

Advantages

• Raises the selling price in a stable market
• Some downside protection
• Flexible, offset at any time

Disadvantages

• Can’t benefit from higher futures price
• Downside protection is limited to the premium sold
• Offsetting before expiration will change the cost & P/L (potential increased cost to buy back in a rising 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 call option represents a target sale price that fits into budget or operating margin
• In a high implied volatility environment historically and/or seasonally

Potential Adjustment

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

Position

Buy a Put Option, Sell a Lower Strike Put Option

Margin Requirement

No, pay the difference in premiums

Advantages

• Establishes a Range of Protection from lower prices
• Cost is reduced by selling lower strike put
• Higher futures price may improve your selling price
• Flexible, offset at any time and receive the remaining value

Disadvantages

• Premium paid in full at time of purchase
• Protection is limited to the lower put strike plus the cost
• 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
• If unlimited protection to lower prices is not necessary or if downside risk can be better defined or measured
• If flexibility is needed to participate in all higher prices
• If capital constraints require maximum pre-defined margin exposure
• As an adjustment to a short future, long put or short collar position after a drop in price
• If in a neutral implied volatility environment

Potential Adjustment

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

Position

Buy a Put Option

Margin Requirement

No, pay premium

Advantages

• Minimum futures price is established
• Higher futures price may improve your selling price
• Flexible, offset at any time and receive the remaining value
• Maximum flexibility for adjustments to both higher and lower prices

Disadvantages

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

When to Apply

• If downside risk is undefined or hard to define
• If flexibility to participate in all higher 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 put up to a higher strike price, and or sell higher strike call against position to capture benefit from increase in price
• In a falling market, roll put down to a lower strike, and/or sell lower strike put against position to help offset initial cost by creating a credit

Position

Sell Futures

Margin Requirement

Yes, variable margin required as market moves higher

Advantages

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

Disadvantages

• Higher futures price does not improve selling 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 higher prices)
• If price outlook is bearish
• Lack of liquidity in option

Potential Adjustment

• In a rising market, protect short futures position by buying a call option or call spread to help increase sale price level set by futures
• In a falling market, replace short futures position with a put option or put spread as market