Previously in this column, we discussed why it would be optimal for active traders to initiate futures position to capture directional price movements in the underlying and use options to capture time decay. We also mentioned that not all traders may be comfortable combining short futures with short puts in the way they combine long futures and short call. In this article, we shall discuss why short futures short put pair is viewed differently from long futures short call pair.
Risk factors
As humans, we are hard-wired optimists. Importing this behavioural bias into the trading world means that we prefer taking long positions more often than taking short positions. The issue is both positions are short in the case of short futures short put pair. Whereas in the case of long futures short call pair, the primary position is the long futures position. The short call is to set up to capture the time decay based on the bet that the underlying is unlikely to break above an overhead resistance level. Therefore, long futures short call pair is behaviourally easier to setup than short futures short put pair.
Then, there is the technical reason. In statistics, asset prices are said to follow a lognormal distribution. That is, the theoretical minimum an asset can decline to is zero. In the real world, an asset is unlikely to trade at zero. Also, asset prices are unlikely to decline closer to zero from their current levels within the expiry of the short-dated option contracts. The theoretical maximum for an asset price is unlimited. In the real world, an underlying asset can move up sharply even within the expiry of the option contracts. So, the upside for an underlying is greater than its downside. This also explains why the Black-Scholes-Merton (BSM) option valuation model assigns a greater value to an out-of-the-money (OTM) call option compared to an OTM put option that is equidistant from the current underlying price.
That said, fear is greater than greed. So, despite the downside being lower than upside, the speed at which an underlying can decline is much faster than the speed at which it can go up. That means shorting puts may not be of much help as a faster downside movement would mean less time-decay-capture on the put position. This is because the faster the underlying declines, the sooner the put will become in-the-money (ITM), forcing traders to close their short position. Traders might as well just short futures and manage the position with strict stop limits.
Optional reading
Technically, short futures, short put pair works the same way as the long futures, short call pair. In both cases, the downside is cushioned by the premium collected on the short option. Also, both positions will not gather losses when the short option becomes ITM, as gains from futures will offset losses on the short option. For this reason, derivative exchanges provide margin benefits on such pairs.
(The author offers training programmes for individuals to manage their personal investments)
Published on December 27, 2025
