• Market:  December 2006 Cotton (CTZ6)
• Tick value: 1 point = $5
• Option Expiration: 11/10/06   
• Trade Description: Bull call spread
• Max Risk: $375
• Max Profit: $1125
• Risk vs. Reward Ratio 1:3

Buy one December 2006 Cotton 54 and at the same time sell one December 2006 Cotton 58 calls for a combined cost and risk of 75 points ($375) or less to open a position.

Technical / Fundamental Explanation
Cotton has been a tough market to trade from the long side so far this year. That being said we are seeing signs that cotton is finding support at its current level. Should this support continue to hold, we could easily expect a bounce to the mid to high 50's. This trade is designed to take advantage of support holding. Commitment of traders data is showing a pattern that in the past has confirmed the bottom that we are calling for. A number of technical indicators have also begun firing off buy signals. This trade keeps costs and risks low, while at the same time keeping probability high because we do not need a lot of movement for this trade to become profitable.

Profit Goal
Max profit assuming a 75 point fill is 325 points ($1125) and occurs at expiration with Cotton trading at or above 58.

Risk Analysis
Max risk, before commissions and fees, and assuming a 75 point fill, is $375. This occurs at expiration with Cotton trading below 54. Break even, assuming a 75 point fill is 54.75.

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.