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