• Market:  July 2006 Cotton (CTN6)
• Tick value: 1 point = $5.00
• Option Expiration: 06/16/06   
• Trade Description: Bull Call Ladder Spread
• Max Risk: $250
• Max Profit:  $1250
• Risk Reward ratio 5:1

Buy one July 2006 Cotton 53 call, also buy July 2006 Cotton 61 call, while selling one July 2006 Cotton 56 call, and also sell one July 2006 Cotton 58 call, for a combined cost and risk of 50 points ($250) or less to open a position.

Technical / Fundamental Explanation
As I mentioned in the cocoa trade earlier today, I believe we are entering a second phase of the boom in the commodity cycle. In the second phase we see the early leaders consolidate the gains while many of the laggards begin to play catch up. Again part of the reason for this will be the softening US Dollar. Cotton is a particularly Dollar sensitive commodity, due to it being heavily exported. In 2003 we exported 72% of all the raw cotton produced in the US. So the Dollar and cotton are inversely correlated. In plain english that means as the the Dollar falls cotton should rise. But this trade is not simply based on the relation to the Dollar. A quick look at the chart below and you can see the range that we have been trading in a consolidating range(in yellow). Notice we just bounced off of trend line support. I am not really expecting a major move here but rather a move back towards the upper end of the range. That is why the max profit range falls in such a wide band that is essentially the upper third of the range. All in all this is a very low risk trade that has a very attractive risk to reward ratio and a very wide range in which we can profit.

Profit Goal
Max profit assuming a 50 point fill is 250 points ($1250) giving this trade a 5:1 risk reward ratio. Max profit occurs at expiration with cotton trading anywhere between 56 and 58. Break even points at expiration are 53.50 and 60.50 which means we have a full 700 point range in which we can profit in.

Risk Analysis
Max risk assuming a 50 point fill is ($250). This occurs at expiration with July Cotton trading anywhere below 53 or above 61.

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.