• Market:  December 2007 Cotton (CTZ7)
• Tick value: 1 point = $5.00
• Option Expiration: 11/09/07   
• Trade Description: Bull call butterfly spread
• Max Risk: $200
• Max Profit: $2300
• Risk reward ratio:  12:1

Buy one December 2007 Cotton 70.00 call and at the same time, buy one December 2007 Cotton 80 call, while selling two December 2007 Cotton 75.00 calls for a combined cost and risk of 40 points ($200) or less to open a position.

Technical / Fundamental Explanation
This trade may seem odd to many of you who follow along with the majority of our trades. I felt I had to at least pass this idea along as it was brought to my attention by a friend who is a local in the cotton pit. This trade was executed this week, and the rumor is that a large block order was executed by one of two famous billionaire traders who will remain nameless. Now I am not able to confirm this story yet, but it is worth noting that whom ever put this position on is not likely to be "dumb money" just based on the size of the bet they made. This trade is simply a low cost way to be long Cotton for the next 11 months. It gives us a very wide rage of profitability and a very high and attractive risk to reward ratio. We do need a substantial move in cotton for this trade to work out, but given the 11 month time frame, there is ample time to patiently wait for this move to take shape. Since risk is so low and defined we can hold on through any adverse price swings with no chance of being stopped out and no fear of our loss ever exceeding $200.

Profit Goal
Max profit, assuming a 40 point fill, is 460 points ($2300) and occurs with December 2007 Cotton trading at 75.00 on the expiration date. Break even points are 70.40 and 79.60 which means we have a band of 920 points in which Cotton can trade, for this trade to be profitable.

Risk Analysis
Max risk, before commissions and fees, and assuming a 40 point fill, is $200. This occurs at expiration with the December 2007 Cotton trading below 70.00 or above 80.00.

Derek Frey is Head Trader at Odom & Frey Futures & Options.

Risk 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.