• Market:  May 2006 mini S&P (ESK6) *This trade can be done in the full sized S&P contract as well.
• Tick value: 1 point = $50.00
• Option Expiration: 05/19/06   
• Trade Description: Bear Put Spread
• Max Risk: $300
• Max Profit:  $1200
• Risk Reward ratio 4:1

Buy one May 2006 S&P 500 1310 put, and sell one May S&P 500 1280 put, for a combined cost and risk of 6 points ($300) or less to open a position.

NOTE: Because the e-mini S&P options are traded electronically most brokers will not take this spread as a spread, therefore this trade requires "legging in," which should only be attempted by professional traders.

Technical / Fundamental Explanation
The S&P 500 has been in a slowly ascending channel for all of 2006 now. I remain a long term bear on stocks in general but this trade is really just a range trade. By that I mean I am really only looking for the market to retrace to the lower end of the range(yellow portion of chart is the range) in the near term. This may in fact be the beginning of a larger fall but it is too early to call anything like that yet. Continued unrest in the Middle East will likely be the "reason" for the sell off in hind sight. For now this is simply range trading at it's best. Notice that the short option is at the bottom of the range. This is an overall low cost way to be short stocks over the next 25 days, this can also be used as a great short term hedge for those currently long the S&P or any of its components.

Profit Goal
Assuming a 6 point fill, break even point is 1304 at expiration. Each full point below 1304 is $50 profit per point until we reach 1280 at which point we have reached max profit of $1200. Max profit assuming a 6 point fill is 24 points ($1200) giving this trade a 4:1 risk reward ratio. Max profit occurs at expiration with S&P 500 trading anywhere below 1280.

Risk Analysis
Max risk assuming a 6 point fill is ($300). This occurs at expiration with the S&P 500 trading above 1310.

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.