• Market:  June 2006 Dow (DJM6)
• Tick value: 1 point = $10
• Option Expiration: 06/16/06   
• Trade Description: Bear put butterfly spread
• Max Risk: $600
• Max Profit:  $4400
• Risk Reward ratio 7:1

Buy one June 2006 11,000 Dow put, also buy one June 2006 10,000 Dow put, while selling two June 2006 10,500 Dow put, for a combined cost and risk of 60 points ($600) or less to open a position.

Technical / Fundamental Explanation
After coming within striking distance of a new closing high for the year the stock market was unable to break through. Since then we have seen this market fall like a rock. Overall there is little that any stock bull can point to that backs up the bull case. Bears on the other hand can point to many things to argue their case. First one being the inverted yield curve. I know that the media has been ignoring this issue since it happened but I must say again that an inverted yield curve always leads to a slowdown in stocks. This fact will begin to get more attention as the market continues to slide in the coming days and weeks. I mentioned in our newsletter that this current sell off in stocks is very likely the start of a bear phase rather than just another pull back within a bull market. This trade has an extremely attractive risk to reward ratio and a huge range in which we can profit. Having a trade that gives you 880 points on the Dow in which you can profit while only risking 60 points all while giving you better than 7 to 1 on your money, do not come around that often. This is also a great trade for all of you holding long stocks or mutual funds. Please head this warning and protect yourself with some "cheap" insurance.

Profit Goal
Max profit assuming a 60 point fill is 440 points ($4400) giving this trade a little more than a 7:1 risk reward ratio. Max profit occurs at expiration with the Dow trading at 10,500. The trade is profitable at expiration if the Dow is trading any where between 10,940 and 10,060 (break-even points) which means we have a band of 880 Dow points that we can profit in.

Risk Analysis
Max risk assuming a 60 point fill is $600. This occurs at expiration with the Dow trading below 10,000 or above 11,000.

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

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.