• Market: March 2007 Cocoa(CCH7)
• Tick value: 1 point = $10
• Option Expiration: 12/01/06
• Trade Description: Defined risk swing trade
• Max Risk: $400
• Max Profit: unlimited

Trade Analysis

March Cocoa has been trying to push through 1550 for the better part of three months. In the past couple weeks we have seen a marked increase in the open interest and volume traded for the contract, and this has coincided with the coca pushing through the resistance @ 1550. We believe this market may be finally giving us the entrance signal we have been patiently watching for since the end of the summer. To take advantage of the next level of resistance @ 1600 we are going to initiate a Swing trade that gets us long the futures contract while also purchasing an offsetting put to protect us. 

Exit Strategy

1. If the support level near 1430 proves not to hold up then we will either exercise the put as a way to exit the trade, or we can sell the option and exit the futures. Market conditions at the time of exit dictate which exit strategy should be chosen.

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 to 1640 and then if we break out above that we are targeting 1780.

Max risk assuming a 40 point net fill is $400 This occurs at expiration with Cocoa trading below 1600.

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.