• Market:  September 2006 Eurodollar (EDU6)
• Tick value: 1 point = $25
• Option Expiration: 09/18/06   
• Trade Description: Strangle
• Max Risk: $350
• Max Profit:  Unlimited

Buy one September 2006 Eurodollar 94.37 call, also buy one September 2006 Eurodollar 94.25 put, for a combined cost and risk of 14 points ($350) or less to open a position.

Technical / Fundamental Explanation
First of all I need to clarify what the Eurodollar market is. It is NOT the Euro currency! Eurodollars are a short-term interest rate market much like T-bills. The Eurodollar pit is the most liquid futures contract traded here in the USA. Those of you who have been regular followers of our trader recommendations know that we typically do a short-term strangle of the 30-year T-Bond market going into any FOMC meeting. After some exhaustive analysis we have determined that doing the same type of trade, but moving it to the short end of the yield curve, should perform much better and at the same time reducing the overall risk significantly. So this trade is a long term strangle with which we are simply trying to catch a move in either direction. The Fed meeting later this week should cause the first spike in volatility as well as directional movement. The added bonus behind this trade is that it is long term enough that we will still be in this trade for the next Fed. meeting on August 8th which too should cause another spike in volatility. With the Fed. on everyone's mind this is the lowest risk trade we could put together that allows us to profit no matter what direction the market goes or what decisions the Fed. makes as long as it goes somewhere.

Profit Goal
Max profit is unlimited. Assuming a 14 point fill this trade is profitable at expiration if Eurodollars are trading any where above and 94.51or below 94.11(break-even points).

Risk Analysis
Max risk assuming a 14 point fill is $350. This occurs at expiration with Eurodollars trading between the strikes prices of the options we bought, 94.25 and 94.37

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.