Market: December 2007 US 30 Year T-Bond (USZ7)
Tick Value: 1 tick = $15.625
Trade Description: Bear put spread
Option Expiration Date: 11/20/07
Max Risk: approximately $500
Max Profit Potential: $1,500
Risk Reward Ratio: 3:1

Buy a December 2007 T-Bond 112 put while selling a Dec. '07 T-Bond 110 put for approximately 32 points ($500) or less to open a position.

Bonds have seen a tremendous rally in the last few weeks on the idea that the Fed would enter into a new rate cutting mode. We will find out on the 18th of September it that in fact is true. Either way we feel bonds have gotten ahead of themselves and should see a pull back even if the FOMC does in fact cut rates next week. Technically we have reached a multi year trend line resistance point as you can see on the chart below. A normal 50% Fibonacci retracement would push bonds back below 110 which is our max profit point.



Profit Goal
Or goal is to catch a move back below 112 on the Dec. futures contract. Break even point is 111-16 assuming a 32 point fill. 100% gross profit would be realized at expiration if the market is at 111. Max profit is realized at expiration if the market is anywhere below 110.

Risk Analysis
Max risk, before commissions and fees, and assuming the above mentioned fill would be $500. The full premium paid for the spread is lost at expiration if the market expires above 112.

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.