• Market:  February 2007 Silver (SIH7)** Feb. options trade based on the March 2007 Silver contract price.
• Tick value: 1 cent = $50
• Option Expiration: 01/25/07   
• Trade Description: Bull call butterfly spread
• Max Risk: $400
• Max Profit: $2100
• Risk reward ratio:  5:1

Buy one March 2007 Silver 14.00 call and at the same time, buy one March 2007 Silver 15.00 call, while selling two March 2007 Silver 14.50 calls for a combined cost and risk of 8 cents ($400) or less to open a position.

Technical / Fundamental Explanation
Silver has seen a very solid bull trend over the past few months and more recently, has been consolidating around the $14.00 level. This consolidation has formed a bull flag and this trade is simply a low cost way to be long an at the money call. To buy the 14.00 call by itself, rather than doing the spread we are suggesting, would cost you in excess of $2500. I mention this so you begin to understand why we do these trades as spreads. Frankly the cost of these options without the spread is too high for the average trader's risk tolerance. That is one of the primary reasons we prefer these types of spreads. Keeping risks low while having a realistic chance to profit. This trade is very attractive because we have a 84 cent range between 14.08 and 14.92 that will result in a profit at expiration. At the same time we keep risk defined and very low for this volatile market.

Profit Goal
Max profit, assuming a 8 cent fill, is 42 cents ($2100) and occurs with March 2007 Silver trading at 14.50 at expiration. Break even points are 14.08 and 14.92 which means we have a band of 84 cents in which Silver can trade, for this trade to be profitable.

Risk Analysis
Max risk, before commissions and fees, and assuming a 8 cent fill, is $400. This occurs at expiration with the March 2007 Silver trading below 14.00 or above 15.00.

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.