The Chicago Board Options Exchange Volatility Index (^VIX, 40.93, down 5.79) rose sharply on Monday as the stock market closed substantially lower.

The VIX measures “fear” on Wall Street and moves higher as the market moves lower. When Wall Street and traders get scared, they tend to trade more and volatility, along with the VIX, soars. When traders grow complacent and content, they tend to trade less and the volatility tends to trend lower.

As you can see, the market is higher this morning which means the VIX is trading lower. Yesterday’s jump marks the highest level of the VIX since 2002 and is only the fourth time the index has been this high. I had mentioned that the VIX could be headed for the 40’s a couple of weeks ago and now that we are here, we could go much higher.

The VIX spent 10 trading sessions in the 30’s and has now jumped into the 40’s basically overnight, suggesting Wall Street anticipates dramatic price swings in market. Although we are 52-week highs for the VIX, who’s to say we can’t head into the 50’s? If the bailout bill continues to drag, it will put even more pressure on the market to get something done.

Rick Rouse
Rick@OptionsMentoring.com

The market posted is worst ever point decline after Congress rejected the $700 billion bailout plan that looked like a sure thing to everyone on Wall Street. That was the problem. As the day wore on it was apparent that the market was nervous and about 1:30 p.m. all hell broke loose after it was clear that the bill would fail.

The Emergency Economic Stabilization Act lost by a vote of 228 (against) to 205 (for). A total of 218 votes were needed to pass. This sent the market into panic mode because the plan was expected to get approval.

By the end of the day, the Dow was down a staggering 777 points and finished at 10,365. The 7% decline was the biggest for the Dow in over 20 years. The Nasdaq fell 9%, or a whopping 200 points, and closed at 1,983. The S&P 500 dropped 9% as well, falling 107 points and ended the session at 1,106.

Talk about getting beat like a rented mule. A sell-off was expected if the bill got shot down but no one on Wall Street expected 10% across the board. They were so sure that the bill would get passed but the market kept giving us great signs that a deal would not get done quickly. Wall Street simply ignored the signs and is now left to deal with the uncertainties. Yes, there will be another meeting on Thursday and yes there is a chance something still gets done.

Look. Something will get done but it will be modified and it will get done when Congress wants to get it done, not Wall Street. I think it was a good move but I still also believe Congress is doing this for the publicity. To be honest though, it is looking like the “good ‘ol buddy” system is in play here because there are too many companies failing at a time when something should have been done by now. It’s like the government is picking and choosing which companies survive and which ones don’t.

Not that it matters, but I would like to see no bailout and let nature run its course. The companies that got into this mess are the ones that should go under for not doing their due diligence. Or, if someone has to pay for it, why not some of the bigger corporations in Amercia? Geez, what did Exxon (XOM, $74.06, down $6.59) make in profits in one quarter? $10 billion. There’s a study out there that shows if the top 20 banks cut their dividend it would pay for the bailout. So yes, there are better ways of doing this.

As far as the market goes, the rest of the week will be crucial if the market hopes to regain any footing.

Rick Rouse
Rick@OptionsMentoring.com

Part of options trading has to do with “a gut feeling” and there are some trades you make based on what you really believe will happen. And there are some you don’t make because of that same feeling. For the past few months, we have done a lot of trades with financial stocks as we have bought call options on sell-offs and put options on rallies in hopes of riding the stock higher or lower.

Wachovia (WB, $1.84, down $8.16) was one of the stocks we played after it sold-off but for some reason I had a feeling Wachovia was in trouble and wasn’t going to bounce higher again. The stock was down 20% Friday and I mentioned the heavy option put buying as a reason not to go long. At the time, I didn’t think Wachovia would fall that hard, that fast but it has. The October 5 puts (WBVQ, $3.20, up $1.70) were going for 85 cents and hit a high of $4.50 when the stock traded as low as a penny. Wachovia shares did not open until much later in the trading session and when they did, the stock reached a low of $0.01. Wow.

The October 7.50 puts (WBVY, $5.70, up $3.20) stood at $1.50 on Friday when we went to press and they have also done well. The put option activity that was going on in Wachovia was a clear warning signal that something was up. In fact, it almost makes you wonder if Wall Street knew this was coming.

Most stocks go up when they are bought out. However, when the company’s not worth as much as its stock you will see these types of things. I was a big believer in Wachovia getting bought and that came true. Thankfully, I still did my research and knew about Wachovia’s trouble mortgage business.

Citigroup (C, $17.75, down $2.40) agreed to acquire Wachovia’s banking operations in a deal that was helped by the Federal Deposit Insurance Corporation. Citi got a great deal and will be able to expand its business while the FDIC could be responsible for loan losses. Sounds like a win-win for Citigroup as Wachovia’s shareholders are left holding the bag. Wicked game this Wall Street, huh?

Citigroup was actually positive at one point today but collapsed with the rest of the market when the $700 billion bailout failed. More on that Tuesday.

Rick Rouse
Rick@OptionsMentoring.com

Apple (AAPL, $109.88, down $18.36) is down sharply this morning after a couple of analysts downgraded the stock. RBC Capital lowered Apple’s stock from “outperform” to “sector perform” while Morgan Stanley (MS, $22.41, down $2.34) shifted gears from “overweight” to “equal weight”. Morgan’s price target for the stock was also lowered from $178 to $115. RBC Capital dropped its target from $200 to $140.

It seems both analysts believe that a weaker economy will hamper the consumer which will lead to less demand for Apple’s products. Hmmm. I’m not sure demand for Apple’s products will suffer as much as its stock is today but the downgrades have hurt. Today’s whipping is the biggest drop in Apple’s stock in seven years.

I have written about Apple for quite some time as well as Research In Motion (RIMM, $66.48, down $4.28). Both stocks have been huge winners in the past and normally go through these wild price swings a few times a year. They have been leaders in the past and will be in the future but the current climate is punishing both stocks.

RIMM recently reported lousy numbers and its outlook scared Wall Street. The stock also got a downgrade this morning. Some of you may have put on an option strangle trade for RIMM based on your comments and emails and that trade has done extremely well.

The October 120 calls (RULJD, $0.03, down $0.01) were going for $1.20 the day earnings were announced and the October 80 puts (RFYVP, $14.85, up $3.50) were going for $2.06. The calls will obviously expire worthless but the puts are up seven-fold. The total cost to buy 10 calls and 10 puts would have been around $3,250. Even if the calls expire worthless, you would still have nearly $15,000 if you sold the puts today. Talk about ROI…

I don’t expect Apple to keep falling as low as RIMM but it could. The market is very irrational right now which means these types of options trades are working. If you wanted to look at Apple as a strangle trade you could follow the October 120 calls (QAAJD, $5.85, down $7.65 and the October 100 puts (QAAVT, $5.35, up $4.55). I think there will be enough movement in Apple that the trade could return 10%-20% over the next few weeks.

Rick Rouse
Rick@OptionsMentoring.com

The market is down sharply this morning as concerns related to the government’s $700 bailout package continue. Congress and the White House did reach an agreement over the weekend but it seems that Wall Street is disappointed that is still has to go to vote. The House is slated to vote later today and there is some nervousness in the market.

This is a difficult vote because it comes in an election year and there is a chance that the unpopular bailout package is not approved. President Bush was cheer-leading lawmakers to pass the bill, saying it is needed to “keep the crisis in our financial industry from spreading” across the economy.

There are many provisions that are unknown but one that is known is that the government will be authorized to purchase the assets from some of these financial firms and will help financial institutions to resume lending to individuals and businesses.

There is some heavy skepticism with this bill and that is why the market is being jittery. The Dow is down 275 points to 10,868. The Nasdaq is slipping 85 to 2,100 while the S&P 500 is lower by 40 points and is at 1,172. We should know something in a couple of hours concerning the status of the bill but I don’t expect we are going to see the big rebound everyone was hoping for. In fact, if the bill fails we could get a huge drop in the market.

Rick Rouse
Rick@OptionsMentoring.com

Well, we all knew there would be drama when it came to getting the $700 billion banking bailout package approved by the government. Instead of fighting to get this thing done, both sides seem to be tripping over their own two feet to be the first in line to take credit for it. On Thursday, in what looked like a sure thing to get it passed, Republican lawmakers rejected the emergency financial rescue package last night after both parties pretty much had announced they were near an agreement on a deal. I guess that’s why they call it politics…

Anyway, as far as the market, we opened 150 points lower on the Dow this morning but as the day has progressed the market has rebounded but is still down 60 points. Part of the big drop at the open was news that the FDIC had seized Washington Mutual (WM, $0.16, down $1.53) on Thursday and then sold the assets to JPMorgan Chase (JPM, $44.30, up $0.84) for nearly $2 billion. Yeap, as Queen said it best…Another One Bites the Dust.

WaMu was the largest financial firm in history to collapse under the mortgage debt market and it shows just how serious the housing market has crippled our economy. Of course, the news isn’t earth-shattering by any means and it was almost excepted. WaMu joins the ever growing list of companies disappearing and I’m sure there’s more to come.

Wachovia (WB, $10.75, down $2.95) is getting a 20% haircut this morning as volume has hit 100 million shares. The options for Wachovia are also trading at a furious pace with huge positions being taken in the October 5 puts (WBVQ, $0.86, up $0.66, or 325%). Volume has swelled to 33,000 contracts thus far. The October 7.50 puts (WBVY, $1.50, up $1.05, or 233%) are also active. I’m not sure if Wachovia will trade down to $5 but there is growing open interest at the 2.5 through 10 October puts strike prices. We have traded Wachovia in the past but let’s stay on the sidelines with this one. Something doesn’t feel right with Wachovia anymore.

Change is good and and the way the market is acting it looks like it is smelling a deal. It still remains to be seen but we can almost bet the farm a deal will get done and that should help the market over the near-term.

Rick Rouse
Rick@OptionsMentoring.com

Research in Motion (RIMM, $97.53, up $0.82) reported earnings after the bell and they weren’t pretty. Wall Street was eager to hear the news but punished the stock in after-hours trading when the company missed earnings by a penny. I mentioned on Monday that analysts were looking for revenues of $2.6 billion and earnings-per-share of $0.87. RIMM also missed revenues by $20 million.

We also talked about RIMM’s September numbers which were a little funny but this could have been because consumers are waiting for the arrival of the company’s new Bold smartphone. The company said new subscriptions were 2.6 million, which matched expectations but new devices sold only reached 6.1 million, not the 6.3 million Wall Street was expecting. So maybe consumers were/ are holding out or just buying the iPhone instead.

In after-hours trading as I write this, RIMM is down $18.88 to $78.65. Yikes. I was hesitant to recommend another strangle option trade on RIMM because I thought we would only see a 10% move in the stock either way. We had used the October 120 calls (RULJD, $1.20, down $0.36) and the October 80 puts (RFYVP, $2.06, down $0.54) as a strangle on September 16 and closed both sides of the trade within a week. We made a gain of 40% with that trade. The after-hours drop of 20% for RIMM should hold up to make this trade profitable if you put this strategy on before earnings.

Rick Rouse
Rick@OptionsMentoring.com

It looks like the financials are getting close to being “rescued” by the government as both the Democrats and Republicans have made “tremendous progress” in negotiations over the $700 billion rescue for Wall Street. Let the debate begin on whether this is a good idea or not but it looks like it will happen over the weekend. In other words, Monday morning’s open could be huge. I say that with reservation but that is how the market should react.

There is so much riding on this package that many analysts believe that if this thing doesn’t go through then we are in big, big trouble. I’m not so sure of that because I believe there are many other solutions that would work that have not been heard. It’s just a timing issue and for the stock market it needs an infusion.

The market took a huge dive last Wednesday and Thursday as the Dow hit a low of 10,400 and was on the brink of a total collapse. Word of this bailout package helped stabilize the market and as you can see, if it fails, the market fails. Of course, the market still has a number of issues to work through and October is just around the corner. October has been the month where we have had some of the most historic corrections ever.

I’m leaning towards a rally but remain cautious as many investors keep selling into the rallies. If we can get a mini-rally for the market on the news of an approved bailout package then we could go long by buying options on any of the indexes. I prefer to use the PowerShares QQQ Trust (QQQQ, $41.52 up $0.66) when going long or short the market.

The October 43 calls (QQQJQ, $0.81, up $0.12) are up 17% this morning and could be worth a roll of the dice based on the belief the market will rally next week. It is clearly a lottery play.

Rick Rouse
Rick@OptionsMentoring.com

You know your stock has got to be “cheap” or “undervalued” when Warren Buffett steps in. That is exactly what happened after the market closed on Tuesday as Berkshire Hathaway (BRK-A, $128,800, down $2,200) announced it is investing at least $5 billion in Goldman Sachs (GS, $125.05, up $4.27). This is a pretty big deal and the market must have gotten wind of this before the final bell.

I had mentioned that some of the financial stocks were getting near our targeted areas yesterday and Goldman was quickly becoming my favorite one out of the bunch for a couple of reasons. First, best of breed. When it comes to owning an investment firm, Goldman tops my list. Secondly, Goldman Sachs (and Morgan Stanley) was one of the last two independent investment banks on Wall Street.

However, just two days ago both companies got the A-okay from the Federal Reserve to change their status to “bank holding companies.” This move gave Goldman broader access to borrow money and the ability to build a base of solid deposits.

Berkshire Hathaway’s investment in Goldman could double as the company also got warrants to buy another $5 billion in Goldman’s common stock. The first $5 billion is in Goldman’s “preferred stock” which will pay 10% and can be bought back by Goldman at any time for a 10% premium. The warrants allow Berkshire to buy $5 billion in common stock at $115 per share any time over the next five years. Goldman also said it would raise another $2.5 billion in its own public stock offering. Basically, Goldman just got the green light to print money.

The $115 tag is exactly what the shares were trading for when I did the blog yesterday. The point is not to toot my own horn but to let you know what is working in this market and what isn’t. The news sent shares of Goldman Sachs higher and the futures soared last night on a day the Dow posted another triple-digit decline.

Goldman reacted well in after-hours trading, up $9.70 to $134.75. That’s a 20-point move from lunchtime yesterday. The October 135 calls (GSJG, $6.90, up $0.10) traded as low as $3.80 yesterday. They will certainly see a big pop if last night’s gains hold.

Goldman Sachs’ shares had been falling at a rapid pace before the government announced its rescue plan. The bears were obviously targeting Goldman as they figured it would be the next General to fall during this financial war of bad debt. Now the question is if the SEC and/ or the government will have to look into Wall Street cashing in on our taxpaying money.

Here is what Mr. B said of the company…”Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”

Maybe the Geico lizard is showing up on Goldman early but rarely does Mr. B make a mistake. Especially one of this magnitude. You think he is risking $10 billion on a stock going nowhere? His favorite quote of mine is: “I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.”

Is that what we are seeing now? I mentioned back in August that September and October were historically bad months for the market and so far that has played out like Charlie Daniel’s fiddle. I’m not sure how bad October will be because no one has a crystal ball for the market. What I think could happen is a lower market into October and then a huge rally. And again, I’m just going by history and how this the market appears to be setting up.

I think once the details of how this $700 billion is going to be taken care of, the market will rally. And it could rally big-time. We also have the election which is usually bullish plus earnings season is right around the corner and we could get some surprises. Wall Street has lowered the bar so far that many companies could easily blow-away expectations.

As far as the other financial stocks, they rebounded as well:

Citigroup (C, $19.99, down $0.02) was at $18

Morgan Stanley (MS, $28.00, up $0.91) was at $25.36

Wachovia (WB, $14.75, down $1.85) hit a low of $14.01 but still ended lower by over 10%.

Of the three, Morgan Stanley looks to be the “safest”. Although risky, I think Morgan could ride Goldman’s coat tail on this one. Watch the Morgan October 30 calls (MSJF) this morning. They closed at $2.55.

Note: I gave a quote for Berkshire Hathaway’s Class A stock which is correct, it is currently going for $128,800 for ONE share but the Class B shares are a little cheaper…(BRK-B, $4,300, down $55.00) a share…

Rick Rouse
Rick@OptionsMentoring.com

The market has been moving slightly higher this morning as Congress debates the $700 billion financial rescue package for the troubled credit markets. Wall Street is watching like a hawk to find out the details and there’s a lot riding on how this thing is set up. The Dow is up 22 to 11,038 after rising more than 120 points in the morning. The S&P 500 is trading higher by 2 points to 1,209, and the Nasdaq is in the green by 5 to 2,184.

Our buddy Bernanke urged Congress to get this package through in a hurry and warned “the implications for the broader economy could be quite adverse”…perhaps the biggest understatement of the year. Look, Congress will make this thing work, no matter what the consequences because they can’t announce this big of a package and then not have it go through quickly.

The government is taking some steps in the right direction but the fundamentals for many of the bank stocks and financial institutions are still weak. Yes, there could be a “cleansing” of the books but there will be more pain before it’s full steam ahead.

The dollar is also rebounding today, while gold stocks are taking a breather after Monday’s big advance. Some of the financial stocks we follow are getting to our targeted areas again:

Citigroup (C, $19.15, down $0.87)

Goldman Sachs (GS, $115.94, down $4.84)

Morgan Stanley (MS, $26.84, down $0.25)

Wachovia (WB, $15.04, down $1.56)

If we can get another 10%-20% drop it will be time to go long again on some of these names.

Rick Rouse
Rick@OptionsMentoring.com