• Market:  December 2006 Soybean Meal (SMZ6)
• Tick value: 1 point = $10
• Option Expiration: 11/21/06   
• Trade Description: Bull call Butterfly spread
• Max Risk: $300
• Max Profit: $1200
• Risk vs. Reward Ratio 1:4

Buy one December 2006 Soy meal 165 and 195 calls and at the same time sell two December 2006 soy meal 180 calls for a combined cost and risk of 30 points ($300) or less to open a position.

Technical / Fundamental Explanation
Soybean meal is simply what is left over after soybeans have been "crushed". The oil usually becomes vegetable oil and the meal is usually used as feed for livestock. Soy meal and corn are used interchangeably by farmers to feed there livestock so these two markets are closely correlated. While we went long corn yesterday based on some ideas about all the switching farmers are planning from corn to wheat, this trade is based on another idea all together. The Corn/Meal spread has very heavily favored corn for the last few months and we are beginning to see signs that this is changing. We are simply expecting the relationship between corn and meal to move back closer to the norm. Since grain prices are already very low it is more likely that this relationship will normalize by meal gaining on corn rather than corn falling against meal. So that is why we are long both corn and meal at the same time. This trade gives us a great risk to reward ratio while keeping actual dollars at risk to an absolute minimum.

Profit Goal
Max profit assuming a 30 point fill is 120 points ($1200).

Risk Analysis
Max risk, before commissions and fees, and assuming a 30 point fill, is $300. This occurs at expiration with Soybean meal trading below 165 or above 195.

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.