• Market:  May 2007 Coffee (KCK7)
• Tick value: 1 point = $375
• Option Expiration: 04/13/07   
• Trade Description: Bull call spread
• Max Risk: $468.75
• Max Profit: $1406.25
• Risk reward ratio:  3:1

Buy one May 2007 Coffee 125 call while selling one May 2007 Coffee 130 call for a combined cost and risk of 1.25 points ($468.75) or less to open a position.

Technical / Fundamental Explanation
Coffee has just bounced off of strong support this past week and now looks poised to resume the rally we saw in the 2nd half of 2006. On the weekly charts we have seen a number of indicators issue buy signals including ADX as shown on the chart below. You can also see that we bounced just shy of a 62% fibonacci retracement which is one of the best retracement levels within a longer term bull market. Elliot wavers in particular like to see a 62% retracement on wave 2 like we are seeing on the chart below. Take all these factors and add them up and you have the makings of a bull market and this trade is the lowest risk way we could find to position for this trend.

Profit Goal
Max profit, assuming a 1.25 point fill, is 3.75 points ($1406) and occurs with Coffee trading anywhere above 130 at expiration. Break even point is 126.25.

Risk Analysis
Max risk, before commissions and fees, and assuming a 1.25 point fill, is $468.75. This occurs at expiration with Coffee trading below 125.

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.