Choosing an

Options Trading
Strategy
Common Strategies to Trading
Options on Futures

The private client division of R.J.O’Brien & Associates

r jofutur es.com 800.441.1616

IMPORTANT INFORMATION ABOUT TRADING FUTURES

The risk of loss in trading commodity futures and options is substantial. Before trading, you
should carefully consider your financial position to determine if futures trading is appropriate for you.
When trading futures and/or options, it is possible to lose more than the full value of your account.
All funds committed should be risk capital. Trading advice is based on information taken from trades
and statistical services and other sources which RJ O’Brien believes are reliable.
We do not guarantee that such information is accurate or complete and it should be relied upon as such.
Trading advice reflects our good faith judgment at a specific time and is subject to change without notice.
There is no guarantee that the advice we give will result in profitable trades. All trading decisions
will be made by the account holder. Past performance is not necessarily indicative of future trading results.
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Table of Contents

Introduction....................................................................................................................................3
Getting Started.............................................................................................................................4
Bull Call Spread............................................................................................................................5
Bear Put Spread............................................................................................................................6
Long Straddle...............................................................................................................................7
Short Straddle..............................................................................................................................8
Long Strangle...............................................................................................................................9
Short Strangle.............................................................................................................................10
Calendar Call Spread.................................................................................................................11
Ratio Call Spread.........................................................................................................................12
Ratio Put Spread........................................................................................................................13
Strategies at a Glance................................................................................................................14
Quiz Yourself..........................................................................................................................15-17
About the Author........................................................................................................................18
Additional Free Resources........................................................................................................19

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Introduction

Thank you for your interest in the RJO Futures Introduction to Options Trading
Strategies.

Many traders turn to options for their leveraging power, limited risk, and potential for higher returns. They can also be
a versatile alternative, providing the ability to take advantage of price movements in commodities, foreign currencies,
stocks and interest rates.

This guide is meant to complement the RJO Futures Introduction to Options Trading Guide, by taking you to the next
step in understanding options trading: Determining which options strategy might be best for you. It provides definitions,
charts and examples to help you get started.

Although options can offer an opportunity to diversify your portfolio, options traders are still exposed to risk and trading
options is not suitable for all investors. You should work with an RJO Futures Sr. Trading Advisor to determine if options
trading is right for you.

The guide was written by RJO Futures Sr. Trading Advisor Donna Heidkamp, applying her 12-plus years of industry
knowledge and experience. As you study the content, we encourage you to contact Donna or any RJO Futures Sr.
Trading Advisors or Trading Consultants with questions or comments. It’s our goal to help you understand how to apply
the information within.

Regards,
RJO Futures’ Sr. Trading Advisors

Phone: 800-441-1616 or 312-373-5478

Email: info@rjofutures.com

IMPORTANT INFORMATION ABOUT TRADING FUTURES

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully
consider your financial position to determine if futures trading is appropriate for you. When trading futures and/or
options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past
performance is not necessarily indicative of future results.

3

Getting Started
The RJO Futures Introduction to Options Trading
Strategies guide focuses on specific types of common
option strategies to help you further understand real
uses of options and your potential risk and reward in the
market. Although this guide does not include all possible
strategies, the most common strategies are included.
The purpose of this guide is to offer a bridge between
the RJO Futures Introduction to Options Trading Guide
and actually trading options in the market.
Reading the Graphs
The included graphs provide examples of various option
strategies that you may find helpful. Please note that
the strategies are not current market recommendations.
They were simply compiled to give you a visual aid to
various option strategies. The underlying price, the
market volatility, interest rates, and time value (days
until expiration, or DTE) all contribute to the value of the
option strategy. In the accompanying graphs, the red
line depicts that value of the option strategy today. The
green line illustrates the value of the option strategy at
expiration. As time value decays, the red line and green
line gradually converge—assuming the volatility and
interest rates stay the same until expiration. The X-axis
is the underlying price of the contract. The Y-axis is the
potential reward/risk for each strategy in price units.
Risks of Trading Options
It is also important to note that the risks of trading option
strategies are often underestimated, because it is very
difficult to calculate the exact time frame and size of a
market move. Traders often refuse to “cash in” prior to
expiration, and wind up losing their investment.
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How Much Time Do You Have
to Monitor the Markets?
For traders with limited time to evaluate the markets,
limited risk option strategies may be just what you are
looking for. Many limited risk option strategies allow
you to participate in the market without watching and
evaluating the markets as closely as if you were trading
straight futures. However, you should always be aware
of the underlying market, and analyze possible trend
changes to help you time entry and exit levels for your
strategy. If you have limited time to analyze the markets,
you may want to work with RJO Futures Senior Trading
Advisors to help you monitor the market. Communication
is the key to a successful full service trading relationship,
and they can be reached at 1-800-441-1616 or through
www.rjofutures.com.
Margins on Unlimited Risk Strategies
Another factor to consider when trading options includes
possible SPAN margin requirements (standardized
portfolio analysis of risk) set by the exchange. Limited
risk strategies typically do not have additional margin
requirements from the exchange. However, unlimited
risk strategies do. The SPAN margins can change daily
as market conditions change and the underlying price
fluctuates. Therefore, if you are trading an unlimited
risk option strategy, you should always maintain plenty
of margin excess in the account to avoid the risk
of becoming overleveraged. If you have a question
regarding the SPAN margins and you are a current
customer, I recommend that you contact your RJO
Futures representative to request a hypothetical SPAN
calculation.
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Bull Call Spread

Bullish Limited Risk Strategy EXAMPLE:

The bull call spread allows you to capture potential profit
in a market, with limited risk to the net premium paid
+ commission and fees. You would be purchasing (pay
the premium) a lower strike call and writing (collect the
premium) a higher strike call simultaneously. The lower
strike call will always be worth more than a higher strike
call, because the odds of the lower strike being in the
money and having value at expiration is higher.
Long 1 December Corn 450 Call for 152
Short 1 December Corn 500 Call for 56
Days to Expiration: 43
Net Premium = 152 - 56 = 94 cents (9 ½ cents in
layman’s terms)
10 (1 cent) in the Corn = $50
Net Premium in $ value = 9 ½ * $50/tick = $475

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Bear Put Spread

Bearish Limited Risk Strategy EXAMPLE:

The bear put spread allows you to capture potential profit
in a market with limited risk to the net premium paid +
commission and fees. You would be purchasing (pay
the premium) a higher strike put, and writing (collect the
premium) a lower strike put simultaneously. The higher
strike put will always be worth more than a lower strike
put, because the odds of the higher strike being in the
money and having value at expiration is higher.
Long 1 December Corn 400 Put for 194
Short 1 December Corn 350 Put for 60
Days to Expiration: 43
Net Premium = 194 - 60 = 134 cents (13 1/2 cents
in layman’s terms)
10 (1 cent) in the Corn = $50
Net Premium in $ value = 13 1/2 * $50/tick = $675

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Long Straddle

No Directional Bias Strategy EXAMPLE:

with Limited Risk
A long straddle buys a call and put with the same
strike simultaneously. This scenario is ideal for tightly
consolidated markets with low volatility and the
likelihood of breaking one direction or another—and are
perceived to have increasing volatility. The risk is limited
to the premium paid for both the call and the put. The
maximum market risk is recognized at expiration, if the
market closes at the strike price.
Long 1 March Crude Oil 8600 Call for 1214
Long 1 March Crude Oil 8600 Put for 952
Days to Expiration: 131
1 tick in the crude oil = $10
Premium Paid in $ value = 1214 + 952 = 2166 *
$10/tick = $21,660
Profit potential above = 8600 + 2166 = 10766
Profit potential below = 8600 – 2166 = 6434

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Short Straddle

No Directional Bias Strategy EXAMPLE:

with Unlimited Risk
A short straddle sells a call and put with the same strike
simultaneously. This scenario is ideal for markets with
high volatility that are likely to trade in a longer-term
range and expected to decrease in volatility. The risk is
unlimited if the market moves above or below the strike
price + or - the premium collected. In this scenario, you
are always at risk on either the call or the put–depending
on which direction the underlying market is going. In this
example, you would be at risk of loss if the market rallied
above 10766 or below 6434 at expiration.
Short 1 March Crude Oil 8600 Call for 1214
Short 1 March Crude Oil 8600 Put for 952
Days to Expiration: 131
1 tick in the crude oil = $10
Premium Collected in $ value = 1214 + 952 = 2166
* $10/tick = $21,660
Risk of loss above = 8600 + 2166 = 10766
Risk of loss below = 8600 – 2166 = 6434

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Long Strangle

No Directional Bias Strategy

with Limited Risk
A long strangle buys a call and put with the different
strike prices simultaneously. This scenario is ideal for
markets that are currently trading at lower volatility
levels in a range, but are expected to break out of the
range and to increase in volatility. The risk is limited to
the premium paid for both the call and the put. Maximum
risk is recognized if the market closes at or between the
two strike prices at expiration.
EXAMPLE:
Long 1 December 2008 Gold 970.00 Call for 28.3
Long 1 December 2008 Gold 850.00 Put for 37.0
Days to Expiration: 47
1 tick (10) in the gold = $10
Premium Paid in $ value = 28.3 + 37.0 = (65.3*100)
= $6530
Potential profit at expiration above = 970.0 + 65.3
= 1035.3
Potential profit at expiration below = 850.0 – 65.3

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Short Strangle

No Directional Bias Strategy EXAMPLE:

with Unlimited Risk
A short strangle sells a call and put with the different
strike prices simultaneously. This scenario is ideal for
markets with high volatility that are likely to trade in a
longer-term range and expected to decrease in volatility.
The risk is unlimited if the market moves above or below
the strike price + or - the total premium collected. In this
scenario, you are always at risk on either the call or
the put—depending on which direction the underlying
market is going. In this example, you would be at risk of
loss if the market rallied above 1242.0 or below 658.0 at
expiration. Maximum profit potential exists if the market
closes between the strikes at expiration.
Short 1 December 2009 Gold 1050.00 Call at 89.5
Short 1 December 2009 Gold 850.00 Put at 102.5
Days to Expiration: 411
1 tick (.10) in the gold = $10
Premium Collected in $ value = 89.5 + 102.5 =
(192.0/.10) * $10/tick = $19,200
Risk of loss at expiration above = 1050.0 + 192.0
= 1242.0
Risk of loss at expiration below = 850.0 – 192.0 =
658.0

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Calendar Call Spread
Bullish Strategy with Limited Risk
In this strategy, the calendar call spread is buying an
option with more time value, and selling a near-term
option to help pay for the longer-term option. In this
example, I used the same strike prices—which can also
be referred to as a horizontal spread. However, you can
choose to use this strategy using different strike prices.
The chart below displays the reward/risk of the spread
at the near-term option expiration. This is a limited risk
strategy, because the option leg with more time value
(the long leg) should retain some extrinsic and time
value. At expiration of the spread, the maximum profit
potential would be the value of the long option minus the
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net premium paid for the spread. It is also important to
note that a near-term squeeze for a commodity could
negatively impact the spread relationship as well, which
could reduce profitability and create additional risk.
EXAMPLE:
Sell 1 December 08 Crude Oil 8400 Call at 772
Buy 1 March 09 Crude Oil 8400 Call for 1314
Days to Expiration of the December option leg:
39
1 tick = $10
Premium Paid in $ value = 1314 – 772 = 642 * $10/
tick = $6,420

Ratio Call Spread
Bullish Strategy with Unlimited Risk
A ratio call spread buys a call and sells multiple higher
strike calls than what was purchased. This type of
strategy is ideal if you believe that the bias is for a higher
move, with a ceiling at the higher strike price. It is also
important to note that the time value to expiration and
volatility can have a negative effect on the spread,
which is often underestimated. Therefore, you should
always have plenty of excess capital to withstand market
movements.
EXAMPLE:
Buy 1 December 08 Crude Oil 8500 Call for 644
Sell 2 December 08 Crude Oil 10000 Calls at 222
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Days to Expiration: 39
1 tick = $10
Premium paid in $ value = 644 – (222 * 2) = 200 *
$10/tick = $2,000
In this example, we are using a 1 X 2 ratio call spread.
Maximum profit potential exists at expiration if the
underlying is trading at the higher strike price or 10000
in this example. For a 1 X 2 ratio spread, unlimited
risk exists at expiration if the market moves above
the higher strike price by more than the difference in
strikes less the premium paid.
10000 (higher strike) – 8500 (lower strike) – 200
(premium paid) = 1300 + 10000 = 11300. Unlimited
risk of loss exists at expiration on a close above
11300.

Ratio Put Spread
Bearish Strategy with Unlimited Risk
A ratio put spread buys a put and sells multiple lower
strike puts than what was purchased. This type of strategy
is ideal if you believe that the bias is for a lower move,
with a floor at the lower strike price. It is also important
to note that the time value to expiration and volatility can
have a negative effect on the spread prior to expiration,
which is commonly underestimated. Therefore, you
should always have plenty of excess capital to withstand
market movements.
EXAMPLE:
Buy 1 December 08 Crude Oil 8000 Put for 348
Sell 2 December 08 Crude Oil 6800 Puts at 135
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Days to Expiration: 39
1 tick = $10
Premium paid in $ value = 348 – (135 *2) = 78 * $10/
tick = $780
In this example, we are using a 1 X 2 ratio put spread.
Maximum profit potential exists at expiration if the
underlying is trading at the lower strike price or 6800
in this example. For a 1 X 2 ratio spread, unlimited
risk exists at expiration if the market moves below
the lower strike price by more than the difference in
strikes less the premium paid.
8000 (higher strike) – 6800 (lower strike) - 78
(premium paid) = -1122 + 6800 = 5678
Risk of loss exists in this example at expiration if
the market is trading below 5678.
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Strategies at a Glance

Bullish Strategy with Limited Risk

In trading options, money can be made whether the

market moves up, down, sideways or not at all. But in
order to choose your options strategy, you will need to
decide which direction you think the market is moving in.
This quick “at-a-glance” guide can assist you in deciding
which strategy to use—whether you are bullish, bearish,
or neutral the market.

Option Strategy Market Expectation Risk Reward

Bull Call Spread Buy = Bullish Buy = Premium paid Buy = Difference between strike
Sell = Neutral/bearish Sell = Difference between strike prices – premium paid
prices – premium received Sell = Premium received
Bear Put Spread Buy = Bearish Buy = Premium Paid Buy = Difference between strike
Sell = Neutral/bullish Sell = Difference between strike prices – premium paid
prices – premium received Sell = Premium received
Long Straddle Anticipating increase in volatility Premium paid Unlimited outside of strikes +
premium paid
Short Straddle Limited trading range Unlimited outside of strikes + Premium received
premium received
Long Strangle Anticipating increase in volatility Premium paid Unlimited outside of strikes +
premium paid
Short Strangle Limited trading range Unlimited outside of strikes + Premium paid
premium received
Calendar Call Spread Neutral/Bullish Premium paid for your call - Premium received for selling the call
premium received for the short call
Ratio Call Spread Bullish Risk is unlimited if market falls Upside maximum profit is limited by
below the sum of the profit and difference in strike – premium paid
the higher strike price
Ratio Put Spread Bearish Risk is unlimited if market rises Upside maximum profit is limited by
above the difference between the difference in strike – premium paid
lower strike price and the profit

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Quiz Yourself: Are You Ready to Advance to

the Next Step or Do You Need to Review?

1. Which of these entails selling a call and put with the same strike
simultaneously?
a. Bull call spread
b. Bear put spread
c. Long straddle
d. Short straddle
e. None of the above

2. Which of these entails buying a call and put with different strike prices
simultaneously?
a. Bull call spread
b. Bear put spread
c. Long straddle
d. Short straddle
e. None of the above

3. Which of these entails purchasing a lower strike call and writing a higher
strike call simultaneously?
a. Bull call spread
b. Bear put spread
c. Long straddle
d. Short straddle
e. None of the above

4. A long straddle entails buying a call and put with the same strike
simultaneously.
a. True
b. False

5. A calendar call spread buys an option with more time value, and sells a near-
term option to help pay for the longer-term option.
a. True
b. False

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6. Which of these entails buying a call and put simultaneously?

a. Long strangle
b. Short strangle
c. Ratio call spread
d. Ratio put spread
e. None of the above

7. Which of these entails buying a call and selling multiple higher strike calls
than what was purchased?
a. Long strangle
b. Short strangle
c. Ratio call spread
d. Ratio put spread
e. None of the above

8. A short strangle sells a call and put with different strike prices
simultaneously.
a. True
b. False

9. A ratio put spread is considered bullish.

a. True
b. False

10. Which of these entails buying a put and selling multiple lower strike puts
than what was purchased?
a. Long strangle
b. Short strangle
c. Ratio call spread
d. Ratio put spread
e. None of the above

Answers and Scoring on following page.

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Answers

1 (d), 2 (e), 3 (a), 4 (a), 5 (a), 6 (a), 7 (c), 8 (a), 9 (b), 10 (d)

Each correct answer equals 1 point.

My score:__________

Scoring (out of 10 possible points)

8-10 = You Understand These Options Strategies

Contact an RJO Futures representative at 800-441-1616 now, and learn how you can turn your new
knowledge into possible trading opportunities. We can help.

6-7 = You May Want to Revisit the Material

You’ve learned a fair amount about options strategies. But we recommend you revisit the material to fully
grasp the concepts. Once you have it down, you may be ready to apply what you’ve learned to your
trading.

1-5 = Definitely Revisit the Material, and Take the Quiz Again
No worries. You simply need to reread the material and/or contact an RJO Futures Trading Consultant
at 800-441-1616 for assistance. We’ll be happy to walk you through any parts of this guide to help you to
better understand the content. And we offer many other resources to help you along the way.

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About the Author

Donna Heidkamp

Donna is a Senior Trading Advisor with RJO Futures in Chicago, Illinois. Donna graduated from Texas Tech University
with a bachelor’s degree in Agricultural Economics, and completed the Chicago Mercantile Exchange Agricultural
Broker Training Program, which enabled her to work with experienced floor traders and develop a strong understanding
of the intricacies of trading in the futures markets. Since completing the training program in 1995, she has continued
to gain a well-rounded knowledge of the industry by working as an order clerk, trading desk manager, and broker
for RJO Futures – and now focuses her efforts on helping clients meet their trading goals. Donna also completed a
master’s degree in financial markets and trading from the Illinois Institute of Technology in May of 1999 to better serve
her customers in an ever-evolving and dynamic industry. Donna is a regularly featured commentator on CNBC TV and
Bloomberg.

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Additional Free Resources

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mentary from our trading consultants and advisors. Sign up here: http://rjofutures.com/forms/

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RJO Futures Basics of Money Management

A successful trading plan includes a sound money management plan. Request your free guide

here: http://www.rjofutures.com/forms/risk_mgmt.php?p=

RJO Futures Intro to Technical Analysis

Written by RJOFutures’ own trading strategists, it provides the information you need to apply

this technique to your futures trading. Request your free guide here: https://www.rjofutures.com/

offers/20070411_techguide/index.php

RJO Futures 10 Dos and 10 Dont’s of Trading Futures

This enlightening guide will help newer futures traders with some of the basic principles that

professional traders inherently live by. Request your free guide here: http://rjofutures.com/

offers/10dosanddonts/index.php

Open a Trading Account Today

By Phone: 800-441-1616 or 312-373-5478

Online: http://rjofutures.com/account/open_account.php

By Email: info@rjofutures.com

IMPORTANT INFORMATION ABOUT TRADING FUTURES

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully
consider your financial position to determine if futures trading is appropriate for you. When trading futures and/or
options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past
performance is not necessarily indicative of future results.

19