Market: March 2008 Cocoa (CCH8)
Tick Value: 1 tick = $10
Trade Description: Bull Call Butterfly spread
Option Expiration Date: 02/01/08
Max Risk: approximately $400
Max Profit Potential: $1,600
Risk Reward Ratio: 4:1

Buy March 2008 Cocoa 1800 and 2200 calls while selling two March 2008 Cocoa 2000 calls for a combined max cost and risk of 40 points ($400) or less to open a position.

Cocoa has seen a long term up trend for all of 2007. In just the last few weeks we have seen a nice pullback in this rally and we are using this pullback to reposition ourselves long this market. Technically we have just gotten a strong buy signal from the Williams %R indicator show in the chart below. The last time this indicator gave a buy signal like we are now seeing the market rallied over 600 points. We are not looking for Cocoa to break out to new highs but rather just test the highs we saw just a few months ago.



Profit Goal
Or goal is to catch a move between 1900 - 2100 on the March futures contract. Break even points are 1840 and 2160 assuming a 40 point fill. Max. profit would be realized at expiration if the market is at 2000.

Risk Analysis
Max risk, before commissions and fees, and assuming the above mentioned fill would be $400. The full premium paid for the spread is lost at expiration if the market expires above 2200 or below 1800.

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.