• Market:  March 2007 Dollar Index (DXH7)
• Tick value: 1 point = $10
• Option Expiration: 03/09/07   
• Trade Description: Bear Put Butterfly spread
• Max Risk: $400
• Max Profit: $1600
• Risk reward ratio:  4:1

Buy one March 2007 Dollar Index 84 put and at the same time sell two March 2007 Dollar Index 82 puts, and buy one March 2007 Dollar Index 80 put for a combined cost and risk of 40 points ($400) or less to open a position.

Technical / Fundamental Explanation
Dollar Index has recently had a solid "dead cat" bounce but is now starting to turn lower again. Frankly this bounce has been a gift to all the countries that have announced their intention to diversify themselves away from the Dollar. I hope they took the gift, as the market looks to be turning back to the down side. With China, Nigeria, Iran, and many others announcing their intention to move away from the Dollar it is really a forgone conclusion that this market is going lower. This trade gives us a solid risk to reward ratio while keeping the risk at a bare minimum. Our maximum profit level coincides with the previous low/support level so we are simply targeting a move back to that level over the course of the next 60 days or so.

Profit Goal
Max profit, assuming a 40 point fill, is 160 points ($1600) and occurs with Dollar Index trading at 82.00 at expiration. Break even points are 83.60 and 80.40 which means we have a band of 320 points in which the trade can be profitable.

Risk Analysis
Max risk, before commissions and fees, and assuming a 40 point fill, is $400. This occurs at expiration with Dollar Index trading below 80 or above 84.

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.