• Market:  August 2006 Natural Gas (NGQ6)
• Tick value: 1 point = $10
• Option Expiration: 07/26/06
• Trade Description: Bull Call Butterfly Spread
• Max Risk: $600
• Max Profit:  $4400
• Risk Reward ratio 7:1

Buy one August 2006 Natural Gas 7.00 call, also buy one August 2006 Natural Gas 8.00call, while selling two August 2006 Natural Gas 7.50 calls, for a combined cost and risk of 60 points ($600) or less to open a position.

Technical / Fundamental Explanation
Natural gas has been the laggard in the energy complex so far this season. Since the Katrina highs last year, natural gas has corrected almost all the way to the pre hurricane lows from last year. We are now getting into the summer cooling season where we are all tuning on our air conditioners. This causes a normal seasonal spike in demand. Couple the normal seasonal pattern with the predictions about this hurricane season being as rough as last year and you have the makings of a bull market in natural gas.

Profit Goal
Max profit assuming a 60 point fill is 440 points ($4400) giving this trade better than a 7:1 risk reward ratio. Max profit occurs at expiration with the Natural Gas trading at 7.50. The trade is profitable at expiration if Natural Gas is trading any where between 7.06 and 7.94 (break-even points) which means we have a band of 880 points that we can profit in.

Risk Analysis
Max risk assuming a 60 point fill is $600. This occurs at expiration with Natural Gas trading below 7.00 or above 8.00.

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.