Published on 11/17/2006

Derek Frey explains a bear put spread in orange juice futures.

Option Idea: Bear Put Spread in Orange Juice Futures

Market: February 2007 Orange Juice (JOH7)**Feb. options trade based on the March futures contract.
Tick value: 1 point = $150
Option Expiration: 01/19/07
Trade Description: Bear put spread
Max Risk: $450
Max Profit: $1800
Risk reward ratio: 4:1

Buy one February 2007 Orange Juice 195 put and at the same time, sell one February 2007 180 put for a combined cost and risk of 3.0 points ($450) or less to open a position.

Technical / Fundamental Explanation
OJ is usually a rather quiet market. We have seen this market quietly move up to and through 2.00. This market is thinly traded and has a tendency to pullback after hitting new highs. On the longer term charts you can see that we have just hit very significant long term resistance. This should prove to hold this market back in the near term. This trade is designed to catch a move lower based on this overhead resistance while keeping risks in check.

Profit Goal
Max profit, assuming a 3.0 point fill, is 12.0 points ($1800) and occurs with March 2007 Orange Juices trading at or below 180.

Risk Analysis
Max risk, before commissions and fees, and assuming a 3.0 point fill, is $450. This occurs at expiration with March Orange Juices trading above195, break even at expiration is 192.

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.