Market: November 2007 Canadian Dollar (CDZ7) **November options trade based on the December 2007 futures price.
Tick Value: 1 tick = $10
Trade Description: Bear put butterfly spread
Option Expiration Date: 11/09/07
Max Risk: approximately $400
Max Profit Potential: $1,600
Risk Reward Ratio: 4:1

Buy November 2007 Canadian dollar 1.0000 and .9600 puts while selling two November 2007 Canadian Dollar .9800 puts for a combined max cost and risk of 40 points ($400) or less to open a position.

The Canadian Dollar has recently made major headlines by hitting parity with the US Dollar. This market has seen a very strong uptrend to get to this point. We are now seeing signs that the market is overbought in the near term and should begin to stage a correction this week. While in the longer term we do see this trend higher continuing, in the near term we see a strong probability of a pull back and this trade is a low cost and risk way to try and capitalize on this pull back. We have recently seen a number of indicators issue sell signals including CCI, Stochastics, and RSI. This trade could also be used as a short term hedge for anyone currently long the underlying market. This friday we have the always important monthly NFP (Non-Farms Payrolls, also called the jobs report) report. We expect the Dollar to stage a bounce off of that number and this trade is an attempt to get in ahead of that report.



Profit Goal
Or goal is to catch a move between .9900 - .9700 on the December 2007 futures contract. Break even points are .9960 and .9640, giving us a 320 range in which we can profit. Max. profit would be realized at expiration if the market is at .9800.

Risk Analysis
Max risk, before commissions and fees, and assuming the above mentioned fill would be $400. The full premium paid for the spread is lost at expiration if the market expires above 1.0000 (par) or below .9600.

Derek Frey is Head Trader at Odom & Frey Futures & Options.

Risk Disclaimer
Past performance is not indicative of future results. Trading futures and options is not suitable for everyone. There is a substantial risk of loss in trading futures and options.