• Market:  September Heating Oil (HOU6)
• Tick value: 1 point = $420
• Option Expiration: 08/28/06   
• Trade Description: Bull call Ladder Spread
• Max Risk: $420
• Max Profit:  $1260
• Risk Reward ratio 3:1

Buy one September 2006 Heating Oil 220 call, also buy one September Heating Oil 230 call, while selling one September Heating Oil 224 call, and sell one September Heating Oil 226 call. For a combined cost and risk of 1 points ($420) or less to open a position.

Technical / Fundamental Explanation
A plethora of geopolitical and production concerns have created an excellent trading opportunity in the energy markets. Of the various energies, we believe Heating Oil presents the best trade setup based on our defined risk to reward ratio strategy. The chart of heating oil has been undergoing a textbook consolidation, trading a channel between 198-218 for the last several months. However, most recently the price almost broke out through the upper end only to fall back into the consolidation. We believe the next move up to the 216-218 will follow through to the upside, and are attempting to capture a quick profit while reducing the cost of our entry by selling the two out of the money calls. On the fundamental side, as refiners begin reverting their operations from summer to winter blends heating oil has historically benefited from this seasonal tendency. In addition to the seasonal demand, the Prudhoe Bay pipeline shutdown has created an imbalance in the already unstable supply and demand relationship. Even though the SPR(strategic petroleum reserves), or increased output from Venezuela and Saudi Arabia could alleviate some of the short term supply, the end result is still a disruption in the global supply, which gives fundamental support to the current price levels.

Profit Goal
Max profit is assuming a 1 point fill is $1260 giving this trade a 3:1 risk reward ratio. Max profit occurs at expiration with Heating Oil trading between 224 and 226. The trade is profitable at expiration if the Heating Oil is trading any where between 221 and 229 (break-even points), which means we have a band of 8 points in Heating Oil that we can profit in.

Risk Analysis
Max risk assuming a 1 point fill is $420. This occurs at expiration with the Heating Oil trading below 220 or above 230.

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.