Market: June Crude Oil (CLM7)
Tick value: 1 cent = $10
Trade description: Long Butterfly
Option expiration date: 05/17/07
Max risk: $500.00
Max profit potential: $2000.00
Risk reward ratio: 4:1

Buy June Crude Oil 65 call and one June Crude Oil 70 call while selling two June Crude Oil 67.50 calls for a combined cost and risk of 50 points ($500) or less to open a position.

Crude oil saw a dramatic correction after the Hostage situation in Iran was peacefully resolved. While that is good news it shows that tensions in the region are as high as they have ever been. Crude oil has just today completed an almost perfect 50% fibonacci retracement. At the same time we can see thru the Commitment of traders (COT) report that funds and large traders are aggressively long while small traders remain short. Crude oil looks poised to run back up to test the recent highs just above 68. This is the lowest risk way we could find to be long an at the money call option for the next 30+ days while getting an attractive risk reward ratio.



Profit Goal
Or maximum profit level is realized at expiration with June Crude oil closing at 67.50. Our break even points assuming a 50 point fill are 65.50 and 69.50 so we have a $4.00 range on the price of Crude oil in which we can profit.

Risk Analysis
Max risk, before commissions and fees, and assuming a 50 point fill, is $500. This occurs at expiration with Crude oil trading below 65 or above 70.

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.