• Market:  August 2006 Crude Oil (CLQ6)
• Tick value: 1 cent = $10
• Option Expiration: 07/17/06   
• Trade Description: Bull Call Ladder Spread
• Max Risk: $400
• Max Profit:  $1600
• Risk vs. Reward Ratio 4:1

Buy one August 2006 Crude Oil 75 call, also buy one August 2006 Crude Oil 80 call, while selling one August 2006 Crude Oil 77call, and one August 2006 Crude Oil 78 call for a combined cost and risk of 40 cents ($400) or less to open a position.

Technical / Fundamental Explanation
Crude oil has struggled with the bull side for many months now but we have seen a key breakout to the upside today that should not be ignored for the following reasons. First of all we broke out with the COT report showing that small spec. traders are currently net short which means we have a lot of stops to blow out on the upside. At the same time we have a strong seasonal tendency to rally over the next few weeks. Couple those two fundamental facts with a technical bull flag break out and you have the makings of a bull market. Our proprietary model also shows a very high probability that crude oil will rally above $77 per barrel in the next two to three weeks. This market should also see an increase in volatility so outright futures trading will become increasingly difficult and therefore we feel that this trade is the best way to take advantage of the case outlined above. This trade it gives us a very wide range in which we can profit while at the same time keeping the overall risk low and defined.

Profit Goal
Max profit assuming a 40 cent fill is $1.60 ($1600) giving this trade a very attractive 4 to 1 risk reward ratio. Max profit occurs at expiration with crude oil trading anywhere between $77 and $78 per barrel. The break even points on this trade at expiration are 75.40 and 79.60 which means we have a band of $4.20 in which we can at least partially profit in.

Risk Analysis
Max risk assuming a 40 cent fill is $400. This occurs at expiration with Crude Oil trading below 75 or above 80

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.