• Market:  February 2007 Live Cattle (LCG7)
• Tick value: 1 point = $400
• Option Expiration: 02/02/07   
• Trade Description: Bull call spread
• Max Risk: $400
• Max Profit: $1200
• Risk reward ratio:  3:1

Buy one February 2007 Live cattle 90 call and at the same time, sell one February 2007 Live cattle 94 call for a combined cost and risk of 1 point ($400) or less to open a position.

Technical / Fundamental Explanation
Live cattle is a market I do not trade very often but after going over my weekly view of all the markets, I could not ignore the weekly chart pattern. Here, much like in the wheat trade, we have built a classic bull flag pattern while also doing a 50% fibonacci retracement, and small traders are also short this market as well. These types of pattern combinations have served us well in the past, and are not to be ignored. Part of the reason for the recent fall of in cattle has been the meteoric rise in corn, today we saw corn begin to correct and that could become a catalyst for what we believe is the coming rally in cattle.

Profit Goal
Max profit, assuming a 1 point fill, is 3 points ($1200) and occurs with February 2007 Live cattle trading at or above 94. Break even is 91 so each point that cattle rises above 91 is a profit of $400 until we reach 94.

Risk Analysis
Max risk, before commissions and fees, and assuming a 1 point fill, is $400. This occurs at expiration with February Live cattle trading below 90.

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.