Trade Description
Buy one March Crude Oil 45 put and sell two March Crude Oil 43 puts.  Also, on the same ticket, buy one March Crude Oil 47 call and sell two March Crude Oil 49 calls for a total credit of $1,000-$1,200.  Margin is approximately $1,300, but can fluctuate based on market price, volatility and time.  Options expire on February 16th, 2005.  The trade is intended to not have directional bias so adjust strike prices to “wrap” around or strangle the market.

Explanation
After a major retracement off of all time highs, the market has found buying support above $40.  Fundamentally, crude is bouncing on weather concerns, continuing supply issues from the Middle East and volatility from the upcoming elections in Iraq scheduled for the 30th.  With the possible postponement of the OPEC meeting slated for the same day of the elections, the oil market is actually setup to be range bound for the next couple of months.  This trade plays a range of $39.90 to $52.10 (assuming a $1,100 credit), both extremes offering critical price resistance/support just inside this range.

Profit Scenarios
Max profit at expiration is $3,100 (assuming an $1,100 credit on entry) and can occur in two places - $43.00 on the downside and $49.00 on the upside.  Profit is reduced by $10 per tick below $43.00 to $39.90 (breakeven to the downside) and is also reduced by $10 per tick above $49.00 to $52.10 (breakeven to the upside).  Profit is also reduced by $10 per tick from $43.00 to $45.00 and from $49.00 to $47.00 (whereas profit would be the credit received on the trade if the market settles between $45 & $47 at expiration). 

Risk Scenarios
Max risk is unlimited and occurs at expiration with the market below 39.90 or above $52.10 (assuming an $1,100 entry credit).  Loss is $10 per tick below 39.90 or $10 per tick above 52.10.

Disclaimer
There is risk of loss in all commodities trading.  Commissions and fees vary per individual and therefore are not included in profit, cost and risk scenarios.  Please consult a licensed broker before you trade for the first time.  Losses can exceed your account size and/or margin requirements.  Commodities trading can be extremely risky and is not for everyone.  Some option strategies have unlimited risk.  Educate yourself on the risks and rewards of such investing prior to trading.  James Mound Trading Group, or anyone associated with JMTG or moundreport.com, do not guarantee profits or pre-determined loss points, and are not held monetarily responsible for the trading losses of others (clients or otherwise).  Past results are by no means indicative of potential future returns.

James Mound, owner of JMTG Brokerage LLC, MoundReport.com and author of the book 7 Secrets, writes the Weekend Commodities Review Newsletter. Receive your free weekly subscription to the Weekend Review by e-mail. Click here.