• Market:  October Sugar (SBV6)
• Tick value: 1 point = $11.20
• Option Expiration: 09/08/06   
• Trade Description: Bull call Spread
• Max Risk: $392
• Max Profit:  $1288
• Risk Reward ratio 3:1

Buy one October 2006 Sugar 18 call, and sell one October 2006 Sugar 19.50 call, for a combined cost and risk of 35 points ($392) or less to open a position.

Technical / Fundamental Explanation
Sugar has been on the move now for over a year. Sugar continues to trade more and more like an energy product than a crop. With demand for ethanol increasing exponentially, it is only a matter of time before we see another large bull move in Sugar. The chart below is a weekly chart and you can clearly see the pattern that has formed. This pattern is called a bull flag or pennant. It is what we call a continuation pattern. A continuation pattern is one that, once formed, normally points to a market that will continue to trend in the prevailing direction once the consolidation has run its course. So how do we know when the consolidation has run its course, and we are about to break out and begin trending up again? I am glad you asked. Of course there is no real way to "know" for sure but, there are an number of things we can look at that can help us estimate when it is more likely to happen than not. Notice how the coil has gotten tighter over time. The tighter the coil gets the more likely we are to break out of it. Picture this like a spring that is being compressed and, when released will "spring" up in a big way. This coil is formed when a market consolidates. Consolidations are a normal part of any bull or bear market and are one of the most basic things we as market technicians identify and use. Also notice that this trade is a bit longer term than our normal trades. This is because sugar can be a slow moving market and we may need a bit of time before we see a move back towards 20 cents, which is ultimately what I expect.

Profit Goal
At expiration, assuming a 35 point fill, the break even point is 18.35. Each point above 18.35 is $11.20 profit until we reach 19.50, at which point we have reached max profit of $1288. Max profit assuming a 35 point fill is 115 points ($1288) giving this trade a 3:1 risk reward ratio. Max profit occurs at expiration with Sugars trading anywhere above 660.

Risk Analysis
Max risk assuming a 35 point fill is ($392). This occurs at expiration with Sugars trading below 18.00.

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.