• Market: March 2007 Sugar (SBH7)
• Tick value: 1 point = $11.20
• Option Expiration: 10/13/06
• Trade Description: Defined risk swing trade
• Max Risk: approximately $500
• Max Profit: unlimited

Trade Analysis
In the beginning of 2006, sugar was one of the darlings of the commodities complex. Talk of ethanol, and Chinese demand were all we heard. Since then, this market has quickly turned from darling to dog. This situation in our opinion is about to reverse again. We are calling a bottom in Sugar and expect the 1200 level to hold as support over both the near and medium term.

We are using the March futures with a November option because November is a serial option that trades based on the March of 2007's price.

Turning to the technicalââ,¬â"¢s sugar has reached a point of being very oversold. Momentum is waning and we are starting to see longer term value buying at these low levels. Once we clear out the October contract in the next couple of weeks, we should see sugar begin to trade a bit more freely. We are positioning long ahead of this expected turn and are attempting to buy a bottom. Should this buy prove to be too early we have a number of adjustments we can make to this trade along the way depending on conditions within the market.

Technical Analysis

Exit Strategy
1. If the market falls and stays below 1200 we simply exercise the put and our loss will be the cost of the put.
2. If support does hold and the market does in fact rally we could either exit the put and move a trailing stop in or simply put the stop in and keep the put on in case of a reversal. Again market conditions at the time of exit dictate which exit strategy should be chosen.

We prefer a trailing stops to targets as that will allow us to capture as much of the move as we can.

Profit and Risk Analysis
Max profit is unlimited but our targets are a move back to 1500. If we reach that point we should make at least $1500 on this trade giving us 3 to 1 on our money.

Max risk is the fill on the put, should be about $500 This occurs at expiration with Sugar trading below 1300. Break even at expiration, assuming a fill on the put of 50 points, would be 1350.

Derek Frey is Head Trader at Odom & Frey Futures & Options.

Risk 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.