• Market:  December 2006 Dollar index (DXZ6)
• Tick value: 1 point = $10
• Option Expiration: 12/08/06   
• Trade Description: Bear put spread
• Max Risk: $500
• Max Profit: $2500
• Risk reward ratio:  5:1

Buy one December 2006 Dollar index 86 put and at the same time, sell one December 2006 Dollar index 83 put for a combined cost and risk of 50 points ($500) or less to open a position.

Technical / Fundamental Explanation
The Dollar has been unusually strong this past summer. We are reaching a technically significant level at 87.00 and are looking for this market to begin to pullback after the election cycle is over here in the US. We are also seeing large traders really chase this dollar higher. I know when ever I try to chase a market it almost always fails to follow through once i am in, and I suspect the same will be true in this case. Between the elections the next FOMC meeting on the 24th of this month, PPI and CPI coming out later this week, and all the other lesser reports that are coming out in the coming weeks we see lots of pressure on the dollar. While the Fed. continues its wait and see policy, the rate hikes that have underpinned the dollar are no longer there and we should begin to see the dollar fall back to the previous support levels. So this trade gives us a 5 to 1 shot a profiting from a falling dollar in the near term.

Profit Goal
Max profit, assuming a 50 point fill, is 250 points ($2500) and occurs with the Dollar index trading at or below 83.00.

Risk Analysis
Max risk, before commissions and fees, and assuming a 50 point fill, is $500. This occurs at expiration with the Dollar index trading above 86.00.

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.