Expressing a Futures Spread With Options?

[tommo]

Hi,

I am from a futures trading background, ive traded a lot of intermarket and intramarket spreads.

Im wondering how i would go about capturing a spread move but with options? The obvious answer is say i think Market A will go up and Market B go down relatively i could buy a Call in A and a Put in B.

However, theres an issue with that as the spread (Market A - Market B) might only have a 100 tick range over a few weeks. But the underlying contracts could have a 100 tick range a *day* so the cost of the put and call could be more than what i expect the spread to move (by a large margin).

If it helps explain it better, the reason im thinking along these lines is to try and get the defined risk of a long options position that could allow me to hold a spread position for a longer period without the short term "death by 1000 cuts" keep getting in and out that futures trading can leave you with.

Theres probably also a way i could sell options and lean on my reading of the spread relationship to tip the odds in my favour collecting time decay?


Hopefully that makes sense

Thanks
Tom

 

[H2O]

Im wondering how i would go about capturing a spread move but with options? The obvious answer is say i think Market A will go up and Market B go down relatively i could buy a Call in A and a Put in B.

Your "obvious" answer gives you a completely different return profile... Think about it, what happens if the underlying contracts experience a significant move? (hint: when trading futures, the gain and loss on both your legs are essentially unlimited but if you use a long call and put option, the loss on one of your legs is capped by the option premium you paid.)

Why are looking to express a spread using options? (The answer to this question is key to structuring any options strategy)

 

[tommo]

Your "obvious" answer gives you a completely different return profile... Think about it, what happens if the underlying contracts experience a significant move? (hint: when trading futures, the gain and loss on both your legs are essentially unlimited but if you use a long call and put option, the loss on one of your legs is capped by the option premium you paid.)

Why are looking to express a spread using options? (The answer to this question is key to structuring any options strategy)

Thanks for the reply. The reason for wanting to construct it via options is to make the risk to the position time based rather than price based. Avoid the scenario where you’re stopped out but ultimately proven right on the trade as you can be with futures.