• Market:  October 2006 Coffee (KCZ6) October options trade based on the December futures contract.
• Tick value: 1 point = $3.75
• Option Expiration: 09/08/06   
• Trade Description: Bull call Spread
• Max Risk: $525
• Max Profit:  $3,225
• Risk Reward ratio 6:1

Buy one October 2006 Coffee 110 call, while selling one October Coffee 120 call. For a combined cost and risk of 140 points ($525) or less to open a position.

Technical / Fundamental Explanation
Coffee has always been one of my favorite markets to trade. This is one of the harder markets to trade via futures but with options we can navigate these sometimes very tricky waters while keeping risk in check. Coffee is a market that once it gets going it tends to go on wild runs. Many of you have heard me talk about the CPO modeling program that we use here in the office, well it is now pointing to a very big move up in coffee in the coming days and weeks. While this program is far from a sure thing it has made many great calls in the past and we have no reason to doubt it on this trade. That being said this trade design is betting on a large move up in coffee over the near term while at the same time keeping costs and risks low and defined. This trade has a 6 to 1 risk reward ratio and still manages to keep risks around the $500 level.

Profit Goal
Max profit assuming a 140 point fill is 860 points ($3225) giving this trade a little more than a 6:1 risk reward ratio. Max profit occurs at expiration with Coffee trading above 120. The trade is profitable at expiration if Coffee is trading any where above 111.40 (break-even point).

Risk Analysis
Max risk assuming a 140 point fill is $525. This occurs at expiration with Coffee trading below 110.

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.