• Market:  April 2006 Natural Gas (NGJ6)
• Tick value: 1 point = $10.00
• Option Expiration: 03/28/06   Note: this trade is short term on purpose! 
• Trade Description: Bull call Ladder Spread
• Max Risk: $400
• Max Profit:  $1600
• Risk Reward ratio 4:1

Buy one April 2006 Natural Gas 6.80 call, also buy one April Natural Gas 7.40 call, while selling one April Natural Gas 7.00 call, and also selling one April Natural Gas 7.20 call, For a combined cost and risk of 40 points ($400) or less to open a position.

Technical/Fundamental Explanation
After a huge spike due to Katrina, Natural Gas has sold off quite dramatically. As you can see on the charts below we are quickly approaching a significant support level on both the daily and monthly charts. Many early indicators have already started issuing buy signals, CCI and MACD to name just a few. Notice that Natural Gas has a strong seasonal tendency to rally in March, which is contrary to popular opinions that say the gas usage drops as spring breaks. That may be true in April and May but the chart below shows both a 10 year and 15 year historical tendency to rally through the month of March. Natural gas is one of the most volatile markets that you can trade. Being able to trade this market and only have $400 at risk while at the same time having a strong probability of at least some success is rare in this market.

Profit Goal
Max profit assuming a 40 point fill is 160 points ($1600) giving this trade a 4:1 risk reward ratio. Max profit occurs at expiration with Natural Gas trading between 7.00 and 7.20. The trade is also profitable at expiration if the Natural Gas is trading any where between 6.84 and 7.36(break even points) which means we have a band of 520 points in Natural Gas that we can profit in.

Risk Analysis
Max risk assuming a 40 point fill is ($400). This occurs at expiration with the Natural Gas trading below 6.80 or above 7.40.

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.

Matt Odom is the Managing Partner and Energy Analyst and Derek Frey is Head Trader at Odom & Frey Futures & Options.