Market: June 2008 Gold (GCM8)
Tick Value: 1 dollar= $100
Option Expiration: 05/27/08
Trade Description: Bull call butterfly spread
Max Risk: $1000
Max Profit: $4000
Risk Reward Ratio: 4:1

Buy one June 2008 Gold 950 call and a 1050 call while selling two June 2008 Gold 1000 calls for a combined max cost and risk of $10 ($1,000) or less to open a position.

Technical / Fundamental Explanation
With all the turmoil in the world owning at least a little bit of gold is prudent. If you missed the boat when gold was much lower, this trade is for you. This trade offers substantial upside potential while keeping risk and costs relatively low. The reason for doing this trade via a butterfly is simply to reduce the cost of the 950 call we are buying. To buy the 950 call alone without doing the butterfly would cost in excess of $3,000. Our trade makes money by expiration if Gold is trading anywhere between 960 - 1040, an $80 range. Max profit occurs with gold trading at $1000 at expiration. A loss is realized at expiration if gold is trading below 950 or above 1050. So we have a trade that keeps risk low while buying a very close to the money call option with a large range in which we can profit.



Profit Goal
Max profit, assuming a $10 fill, is $40 ($4000) and occurs with Gold trading at $1000 at expiration. Break even points are 960 and 1040.

Risk Analysis
Max risk, before commissions and fees, and assuming a $10 fill, is $1,000. This occurs at expiration with Gold trading either below 950 or above 1050.

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.