Option strategies offer an interesting paradox. On the surface, a strategy that requires positions in two, three or even four separate options and comes with an oddly exotic name would seem to require more experience and knowledge than a simple long or short futures position, or long call or put. Yet, looked at more closely, strategies using options on stock index futures may provide a good way for you to get started if this is an unfamiliar market sector for you.

To see why, consider how three common strategies -a vertical bull call spread, a long call butterfly and a long call condor - might perform given similar market conditions. Significantly, all three strategies strictly limit your risk. At the same time, all three illustrate a commonplace of the options trade: If you are getting something special in one area, you must be giving up something in another. Here, you pay for the limited risk in terms of strictly limited reward.

Looking at the market
Suppose the June Dow Jones futures contract is trading at 9072, implied volatility is 20%, and there are 67 days to option expiration. Further, when it comes time to exit the trade, suppose that in all three cases the implied volatility drops to 18%, a completely plausible assumption in a rising stock market, and the exit futures prices are those shown in the tables accompanying each strategy. Finally, while you have choices about how to exit option trades, assume that you will offset - that is, having initially bought a call, you will sell the same call to offset - one day before expiration. This exit point makes the risk/reward analyses of these strategies almost, but not quite, the same as shown in familiar expiration analysis diagrams.

1. Defining your space on the market slope
A vertical bull call spread offers a good starting place. With June futures at 9072, you could build such a spread by buying the close-to-the-money 9100 June call and selling the 9300 June call.

The table illustrates the details of the trade. In all of these examples, option premiums are signed to show the direction of the cash flow. For example, because a call buyer pays the premium, that outgoing cash flow has a negative value in the table. Because a call seller collects the premium, that incoming cash flow has a positive value. Also, the multiplier for options on Dow futures is $100, so the 9.55 initial net premium translates into $955.

Looking at this display, you can see that there are several benefits of approaching this market through these option strategies.

Vertical Bull Call Spread

	Enter trade	Exit trade	Profit
Futures price	9072	9372
Implied volatility	20%	18%
Days to expiration	67	1
Buy 1 9100 June call	-29.35	27.20
Sell 1 9300 June call	19.80	-8.20
Net premium	-9.55	19.00	9.45
In dollars	-955	1,900	$945

First, notice the cost. The net premium paid on the vertical bull call spread is $955, though that obviously will vary as the data vary in actual cases. Given the same market conditions, a simple long position in the 9100 June call would require a premium payment of $2,935 - roughly three times as much. Clearly, this strategy enables you to get into the market with far less capital than either a simple long call or a long futures position would require.

Second, one day before expiration, this trade breaks even at a futures price of 9195 (breakeven for the long call would be 9366). The maximum profit of $945 occurs any time the futures contract trades at or above 9300. Between breakeven and 9300, you benefit from the rising market much as a long futures position does. You can, of course, vary the degree of that exposure by choosing different strike prices. Using the same market data, a spread long the 9100 June call and short the 9500 would break even with futures in the 9275 area, so you would have a long, futures-like exposure from that point up to a 9500 futures level.

Third, if the market were to suffer even a fairly major "correction," the most you lose, in the case of the 9100-9300 spread, would be the $955 initial net premium. In contrast, a position long the 9100 June call could lose $2,935, and a long futures position, for all practical purposes, faces unlimited losses.

Of course, these benefits have a cost. To wit, you can't make more than the $945 gross profit. This strategy limits the profit potential of the trade just as certainly as it limits the loss potential. If the market soars beyond 9300, you suffer an opportunity loss.

Still, depending on how far you think the market is likely to go during the period the trade will be in effect, that might not be a big problem - especially when you think about the security this strategy can give you, along with the absence of margin calls.

2. Stinging like a bee
The long call butterfly is another bullish trade that looks more complicated than it really is. To put on this trade, you pick three equidistant strike prices - say, the 9100, 9300 and 9500 June calls. You buy one each of the 9100 and 9500 calls and sell two of the 9300s.

Long Call Butterfly

	Enter trade	Exit trade	Profit
Futures price	9072	9300
Implied volatility	20%	18%
Days to expiration	67	1
Buy 1 9100 June call	-29.35	20.00
Sell 2 9300 June call	20.00	-7.00
Buy 1 9500 June call	-12.05	0.05
Net premium	-1.80	13.05	11.25
In dollars	-180	1,305	$1,125

Here again, using options in combination lowers the cost. Given the market conditions illustrated, you pay net premium of only $180, and if the June futures trade to exactly 9300 at or near expiration, the trade can generate a gross profit of $1,125. The other benefits of this trade are much the same as for the vertical call spread in terms of cost, limited risk and control.

The trade-off you can consider lies in the nature of the opportunity. You only can earn the maximum if the futures trade exactly at the middle strike price - here, 9300. You can still earn some profit, but it falls away quickly as the futures price trades above or below the middle strike price.

Holding the other data from the example constant, you can see what the trade will gross at a sampling of futures prices:

Range of Butterfly Results

Futures	9100	9150	9200	9300	9350	9400	9450	9500
Profit ($)	150	440	760	1,030	1,025	770	450	165

Despite its limitations, this strategy can generate good results. Commenting on the low cost and the nature of the opportunity the butterfly offers, a veteran options trader said he thought many an options trader would be willing to pay $180 to pitch horseshoes. As with that competition, a ringer is great, but even a leaner can be worthwhile.

3. Spreading broad wings
For a price, you overcome some of the limitations of the butterfly by shifting to a long call condor. This colorfully named strategy requires that you pick four strike prices. Given these market data, you might buy one each of the 9100 and 9700 calls and sell one each of the 9300 and 9500 June calls.

Long Call Condor

	Enter trade	Exit trade	Profit
Futures price	9072	9400
Implied volatility	20%	18%
Days to expiration	67	1
Buy 1 9100 June call	-29.35	30.00
Sell 1 9300 June call	19.80	-10.55
Sell 1 9500 June call	-12.05	-0.60
Buy 1 9700 June call	-9.90	0
Net premium	-7.40	18.85	11.45
In dollars	-740	1,885	$1,145

You can see that the condor costs far more than the butterfly and, with its four strike prices, will entail greater transaction costs. What the condor does, though, is spread the range of opportunity. As the table shows, this trade will earn a maximum gross profit of $1,145. But while the futures price must reach 9300 exactly to produce the maximum profit for the butterfly, the condor will produce its maximum profit when the futures trade anywhere between 9300 and 9500 at or near expiration. Also, it will earn some profit with futures over 9165 and under 9635. As with both the vertical bull call spread and the long call butterfly, your maximum loss amounts to the net premium paid.

Insurance
Even these brief examples should make clear the possibilities that are available to you if you use these well-known strategies to trade options on Dow Jones (or any stock index) futures. These strategies allow you to participate in these exciting markets with limited capital and for limited risk while you get used to how these options perform. Granted, the introduction of the short call positions limits the upside potential, but it also lowers the cost and the downside potential of the trades.

As you become familiar with these strategies, you can refine your trading approach by factoring in a variety of volatility and time considerations and by varying your choices concerning strike prices. Yet even this simplified approach shows that all these strategies provide a measure of control and, with it, a sense of security. The experiment, if it is that for you, won't cost too much, but the results can be gratifying if you think in terms of what you can earn in two months relative to the size of the initial investment.