For example, at the 92 strike for crude oil futures, 1.0/0.542 or 1.845 calls are sold short for each long futures contract. If the March futures price at expiration equals $92, the trade will be closed out at the maximum profit, $6,442, the credit from sale of calls, $5,812, with a gain on futures equal to the difference between $92 and $91.37 times $1,000, or $630. Lower profits will be made at expiration futures prices between $99.624 and $85.558 as the loss on call short sales is reduced by a gain in the futures price, or the short sale credit offsets losses on the futures contract.
Upper and lower breakeven prices for March 2013 crude oil calls on Dec. 27, 2012 are shown in ““Breakeven prices” (below). The typical pattern for breakeven prices is for the upper breakevens to follow a curve that descends from higher strike prices, hitting the lowest levels near the current futures price then increasing rapidly for calls that are in-the-money. Lower breakeven prices describe a relatively level curve for all strike prices.
Beyond breakeven prices the trade will generate losses. Protective trades between Dec 27 and expiration would include purchase of calls to offset potential losses on sold calls and the sale of additional calls or purchase of puts to reduce losses on a futures price declining beyond the lower breakeven price.
The original neat triangular profit diagram with the profit peaking near the midpoint between the upper and lower breakeven prices will be changed into a more complex shape by successive protective trades.