From the March 2013 issue of Futures Magazine • Subscribe!

Options pricing and delta neutral trades

Bucking expectations

“Variations” (below) shows sequences of variations from expected values on the options price curves for March 2013 crude oil and Swiss franc futures over seven trading days: Dec. 17 through Dec. 27, 2012. Four strike prices are selected for each futures contract to illustrate the possible gains or losses from spreads between strike prices.

Along with the lower volatility shown by the call price curve, Swiss franc calls have relatively low variability around the LLP regression curve. For the measurement dates the Swiss franc variations oscillate between plus and minus $10 from the price curve. This variation seems small when the $125,000 per option point is considered, and the crude oil variations are between $100 and –$20 at $1,000 per option point.

Trading on the basis of dollar variations may include buying or selling individual strikes that are undervalued or overvalued, and spread trades between strikes. Because the price curves rise and fall in response to the underlying, it always is less risky to use spread trades. For example, a short sale of the 93 crude oil call on Dec. 20 resulted in a $578 gain when the call price fell from $2,550 to $1,980 the following day. Spreading with the $97 strike price would have reduced the gain to $260, but both changes occurred while the underlying March 2013 crude oil futures fell from $90.40 to $89.23. 

The current model is available at It is a free Excel download file and is set up to analyze from three to 20 pairs of strike prices and options market prices.

Paul Cretien is an investment analyst and financial case writer. His e-mail is 

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