• Market:  March 2006 Dow (DJH6)
• Tick value: 1 point = $10.00 
• Option Expiration: 03/17/06   
• Trade Description: Bear put butterfly spread
• Max Risk: $300.00
• Max Profit:  $1,700.00
• Risk/reward ratio almost 6:1

Buy one March Dow 11,000 put, buy one March Dow 10,600 put, and sell two March Dow 10,800 puts, on the same ticket, for a combined cost and risk of 30 points ($300.00) or less to open a position.

Technical/Fundamental Explanation
Stocks have been more or less range bound for over a year now. While the Dow itself managed to move to some new highs, none of the the other major indexes have confirmed this "breakout" by following suit. In the last few days we have begun to see many indicators issue sell signals on the Dow, Stochastics both slow and fast, CCI, %R, and RSI, to name just a few. At the same time we have seen the S&P struggle with the 1300 handle. The proprietary system I use is also confirming these other indicators by issuing its own sell signal yesterday. This trade is short term on purpose because the system and indicators I use are pointing to a near term correction. This trade is designed to maximize returns and minimize risks while betting on a 150-450 point correction in the Dow between now and the next "witching day"; the third Friday in March (March 17th). This trade can also be used to hedge existing long positions in the Dow.

Profit Goal
Max profit assuming a 30($300) point fill is 170($1700) points and occurs with the March Dow contract expiring at 10,800. Break even points at expiration are 10,970 and 10,630. This means we have a 340 point range that Dow can expire within that we will result in a profit.

Risk Analysis
Max risk assuming a 30 point fill is 30 points ($300.00). This occurs at expiration with the Dow trading below 10,600 or above 11,000.

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.

Matt Odom is the Managing Partner and Energy Analyst and Derek Frey is Head Trader at Odom & Frey Futures & Options.