Market: December Coffee (KCZ7)
Tick Value: 1 point = $375
Trade Description: Bull call spread
Option Expiration Date: 11/09/07
Max Risk: approximately $562.50
Max Profit Potential: $3,187.50
Risk Reward Ratio: Better than 5:1

Buy a December 2007 Coffee 125 call while selling a Dec. '07 Coffee 135 call for approximately 1.50 points ($562.50) to open a position.

Coffee has been building a macro bull flag on the monthly charts for the last few years now. We are nearing the apex of this long term consolidating wedge which is often the time that a market breaks out. At the same time we just saw a very violent shake out last which also often happens just before a breakout. That shake out also bounced off of an ascending trend line going back to May of this year. Add all these things together and you get what could be the beginning of the next big move up in coffee. Hurricane Dean may also damage the crop in Guatemala which could become one of the fundamentals that backs up the existing technical pattern.



Profit Goal
Or profit goal is to catch a move above 135 on the Dec. futures contract. Break even point is 126.50 assuming a 1.50 point fill. 100% gross profit would be realized at expiration if the market is at 128.00.

Risk Analysis
Max risk, before commissions and fees, and assuming the above mentioned fill would be $562.50. The full premium paid for the spread is lost at expiration if the market expires 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.