• Market:  June 2006 Gold (GCM6)
• Tick value: 1 dollar = $100.00
• Option Expiration: 05/25/06   
• Trade Description: Bull Ladder Spread
• Max Risk: $600
• Max Profit:  $2400
• Risk Reward ratio 4:1

Buy one June Gold 590 call, also buy one June Gold 670 call, while selling one June Gold 620 call, and also sell one June Gold 640 call, for a combined cost and risk of 6 dollars ($600.00) or less to open a position.

Technical / Fundamental Explanation
After peaking in early February, Gold has spent the last two months consolidating in an ever narrowing range. Gold has now broken out of it's triple top wedge pattern that you can see in the chart below. This pattern is what is called a continuation pattern, a continuation pattern is one that once formed usually points to a market that will continue moving in the prevailing direction once the consolation has run its coarse. Today's break out confirms this pattern and we are likely to see gold trading at or above $600 in the near future. With rising interest/demand in metals and continued unrest the world over, isn't it time we all though about buying a little gold?

So why a ladder spread you ask?

I know you have recently seen many ladder trades from us, and I wanted to explain. We continue to do these trades because for the most part they are working! If it isn't broke don't fix it. Ladder spreads have a few features that one should not discount. First of all, by selling out-of-the money options we bring in premium that reduces the cost of the options purchased, and therefore allows us to buy near or even in-the-money options, which have a much higher probability of making money than their out of the money cousins. Also ladder spreads have, if constructed properly, a wide range where they can profit in, unlike butterfly spreads that have more of an exact target to make max profit. For instance with this trade we have 68 dollars in which we can profit at expiration, of which there are 20 dollars where max profit occurs(see below for further explanation). This type of trade allows you to be profitable within a range rather than an exact target, therefore improving probability. For those who wish to simply buy the 590 call you can certainly do that but the cost of the 590 call by itself is roughly $1300 or more than twice the risk we are suggesting in the trade above.

Profit Goal
Max profit assuming a 6 dollar fill is 24 dollars ($2400) giving this trade a 4:1 risk reward ratio. Max profit occurs at expiration with Gold trading anywhere between 620 and 640. The trade is also profitable at expiration if Gold is trading any where above 596 or below 664(break even points) meaning we have a 68 dollar band in gold that we can profit in.

Risk Analysis
Max risk assuming a 6 dollar fill is ($600). This occurs at expiration with Gold trading either below 590 or above 670.

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

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.