• Market:  October 2006 Silver(SIV6)
• Tick value: 1 cent = $50
• Option Expiration: 09/26/06   
• Trade Description: Bull call ladder spread
• Max Risk: $500
• Max Profit:  $2,000
• Risk/Reward Ratio: 4:1

Buy one October 2006 Silver 12.25 call, also buy one October 2006 13.50 call, while selling one October 2006 Silver 12.75 call and sell one October 2006 Silver 13.00 call for a combined premium of 10 cents ($500) or less to open a position.

Technical / Fundamental Explanation
Silver has been range bound for the ladder half of this summer. We have seen a range between 11.75 - 12.75 traded for many weeks now. Today we had a dramatic move back to the lower end of that range and we are using this as an opportunity to buy long ahead of the bounce we are expecting. While metals have had a good run up in recent months this bull is far from dead. As I have said before, I believe this bull is simply resting and building up energy for the upside break out that is yet to come. This idea is based both on Technicals and Fundamentals. Turning first to the fundamentals you can see that demand is not really falling off at all year over year. With our US government continuing to spend money like a drunken school girl on prom night, it is only a matter of time before traders wake up and realize that this country is broke (and broken in my opinion). The coming credit crunch is going to make Black October in 1987, seem like the good old days. Technically we have seen a large run up in metals prices this past year and many might argue that this market needs to pause. We argue that bull markets when they happen often go much further than the "pros" expect. I have had some experience in this area. I wrongly predicted the top of the Dow in 1998, a bit early to say the least. This prediction was based on many of the same indicators that people are using today to say that metals are "overvalued." So again I must advocate buying metals long anytime we approach strong support like we are now. This trade gives us a huge range in the price of silver in which we can profit. Any move between 12.35 and 13.40 would result in a profit at expiration.

Profit Goal
Max profit assuming a 10 cent fill is 40 cents ($2000) and occurs at expiration with the Silver trading between 12.75 and 13.00. This trade is also profitable at expiration with silver trading anywhere between the two break even points( 12.35-13.40) giving us a huge $1.10 range in silver that we can profit in.

Risk Analysis
Max risk assuming a 10 cent fill is $500. This occurs at expiration with the Silver trading below 12.25 or above 13.50.

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.