• Market:  August Dow Jones Industrial Average (DJQ6)
• Tick value: 1 point = $10
• Option Expiration: 08/18/06   
• Trade Description: Bear put Ladder Spread
• Max Risk: $600
• Max Profit:  $3400
• Risk Reward ratio 5:1

Buy one August 2006 Dow 11,200 put, also buy one August Dow 10,200 put, while selling one August Dow 10,800 put, and sell one August Dow 10,600 put. For a combined cost and risk of 60 points ($600) or less to open a position.

Technical / Fundamental Explanation
While recent price action on the index has been somewhat bullish, it remains to be seen if there is any real conviction from the longs to support further upside. From a technical perspective, the inability of sellers to drive the market beneath the previous low @ 10,680 caused a short covering / profit taking rally that generated some short lived buying interest. The lack of conviction from the longs is evident in the declining volume as the recent rally becomes extended and approaches some heavy resistance at 11,300. This gives us an opportunity to enter a short trade that seeks to profit from the re-emergence of several fundamental and geopolitical concerns, that have recently been placed on the back burner by the media. This trade gives us ample opportunity to profit from a market that simply falls back down to the lower end of the already well established range while keeping risk low and defined. Having a risk to reward ratio that exceeds 5:1 also makes this trade very attractive.

Profit Goal
Max profit assuming a 60 point fill is 340 points ($3400) giving this trade a little more than a 5:1 risk reward ratio. Max profit occurs at expiration with Dow trading between 10,800 and 10,600. The trade is partially profitable at expiration if Dow is trading any where between 11,140 and 10,260 (break even points) which means we have a band of 880 Dow points that we can profit in.

Risk Analysis
Max risk assuming a 60 point fill is $600. This occurs at expiration with the Dow trading below 10,200 or above 11,200.

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.