• Market:  August 2006 Cocoa (CCQ6) *August options trade off of the September futures price.
• Tick value: 1 point = $10.00
• Option Expiration: 07/07/06   
• Trade Description: Bull Call Spread
• Max Risk: $350
• Max Profit:  $1150
• Risk Reward ratio 3:1

Buy one August 2006 Cocoa 1600 call, and sell one August 2006 Cocoa 1750 call for a combined cost and risk of 35 points ($350) or less to open a position.

Technical / Fundamental Explanation
Anyone who knows me knows I love Chocolate. Cocoa was the first market I ever traded when I started trading on my 18th birthday. I made $620 in 3 days on one contract and thought I was king of the world, but i digress. My point is that cocoa has always held a special place in my heart. That is one of the reasons it has been so hard for me to ignore the cocoa market for the last 6 months. But after a long hiatus I am back and am expecting some solid gains in cocoa as we move forward. Part of the reason for this is the intermarket relationships that exist within commodities. If you have been paying attention at all you have seen the incredible run we have had in the metals and energy parts of the complex. In just the past few days we have begun to see this run up stall out and begin to correct. While metals and energies have been getting all the attention, markets like the grains and softs have, for the most part, not yet participated in the general rise in commodities. This is all about to change. We are entering the second phase of a commodities boom. One where we begin to see the early leaders begin to cool and consolidate while many of the laggards play catch up. Part of the "reason" for this will be the softening US Dollar. Many of the softs and grains are very sensitive to the Dollar since we export large amounts of them. Over all this is a very simple bull spread that keeps risk and costs low while giving you better than 3 to 1 on your money.

Profit Goal
Max profit assuming a 35 point fill is 115 points ($1150) giving this trade a little better than a 3:1 risk reward ratio. Max profit occurs at expiration with cocoa trading at or above 1750. Break even point at expiration is 1635.

Risk Analysis
Max risk assuming a 35 point fill is ($350). This occurs at expiration with September Cocoa trading anywhere below 1600.

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.