Previously in this column, we discussed an aggressive strategy initiated to take advantage of a possible exhaustion of bull. The strategy involved falling short in future mills and at the same time that it falls short in a purchase option. This week, we continue this discussion, explaining the benefits and costs of combining a short call with a futures contract.
Time benefit
The futures contract does not suffer from decomposition time as the options do. That means that futures can have a movement almost one by one with the underlying even closer to the expiration of the contract. With the options, the faster they move in the preferred direction after starting the position, the better. But that argument is true for a long option position. If you have little options, the slower it moves after starting the position, the better it will be for the position.
Suppose it has an opinion that bull exhaustion could cause the price to decrease slowly. Therefore, the short future is a better alternative than spending a lot of time. But why also cut a call option? This question is relevant because the margins in the short call are similar to those of the position of future shorts. It is important to note that futures can offer greater profits for a given movement in the underlying. Therefore, you can also cut an additional futures contract instead of shortening a call. But shortening an option has a benefit. The risk of betting on the exhaustion of a bull is that the underlying can falsify and then continue galloping up. The almost one by future movement can expose its position to great losses. So, duplicating his future position is risky. If you cut a purchase option, an acute advantage in the underlying may not cause acute movement in the purchase option. This is because the decomposition time works in the option position and reduces the losses incurred if the underlying increases. Anyway, it must trade with the loss of detention.
Optional reading
When an underlying goes up, the price of the purchase option increases, captured by its delta. The gamma accelerates the delta but is of a small value. Theta slows down the ascending movement of an option price when the underlying moves up, as the time value is reduced with each day passing. When the underlying moves down, the price of the purchase option generally decreases more than what increases for the same change in the underlying price. This is because the problem is that Delta has a greater value compared to gamma. The delta captures the change in the option price for a change of a point in the underlying. Then, when the underlying decreases and Delta turns from a positive factor to a negative factor, the decrease in the price of the option is greater. It is this factor that expects to benefit when combining a short call with a position of future shorts.
(The author offers training programs for people to manage their personal investments)
Posted on May 17, 2025
