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