Oil prices briefly shot up more than $25 a barrel Monday, shattering the record for the biggest one-day gain ever as Wall Street worried about the government’s $700 billion bailout plan. The concerns caused oil to spike and the dollar fell sharply which led to the sharp rise in gold. This all took a toll on the market as the Dow fell 373 points to finish at 11,015. There went Friday’s gains.

Oil jumped as high as $130 a barrel before falling back to settle at $121. A big reason for the jump was the expiration of the Obcotober contracts which expired at the end of the day. This clearly added to the volatility as traders rushed to cover positions.

What was interesting was the fact that the severity of the price move prompted the U.S. Commodity Futures Trading Commission to launch an investigation into whether illegal manipulation was to blame. This has been a topic of interest for quite some time and I always say where there’s smoke, there’s fire.

If you were short oil over the past few months then you probably did well up until the last few days. Oil has gained nearly $30 over the past four trading sessions. The U.S. Oil Fund (USO, $87.62, up $4.99) which tracks prices of West Texas light, sweet crude oil gained 6% yesterday and the iPath Crude Oil ETN (OIL, $64.57, up $3.40) also traded higher.

In other trading, the weaker dollar helped gold prices surge more than $44 to settle at $909 an ounce. It seems that commodities are catching fire because of a general weakness in the dollar. The jump in gold sent gold stocks and options soaring. Take a look at some of the returns from Monday:

Barrick Gold (ABX, $38.14, up $3.04)
October 40 call (ABXJH, $2.20, up $1.20), or 120%

Goldcorp (GG, $36.29, up $4.11)
October 37.50 call (GGJU, $2.10, up $1.20, or 133%

Gold Fields (GFI, $9.72, up $1.16)
October 10 call (GFIJB, $0.91, up $0.51), or 128%

Newmont Mining (NEM, $44.43, up $2.48)
October 45 call (NEMJI, $2.50, up $0.85), or 52%

I mentioned on September 3 that gold was getting cheap and many of these stocks and options were much lower. The October options I’ve listed may have more room to run if gold continues its rally but as we have seen with this market it’s hard to say what’s next.

Rick Rouse
Rick@OptionsMentoring.com

Research in Motion (RIMM, $97.84, down $5.60) fell back below $100 on Monday ahead of its scheduled earnings report on Thursday. The stock has been making $10 swings almost on a daily basis which leads me to believe the stock will make a substantial move by the end of the week.

There are some analysts who expect RIMM to post solid quarterly results, with revenues of $2.6 billion and earnings-per-share of $0.87. Although early October’s availability of the company’s 3G Bold and Kickstart have acted as a near-term catalyst, there’s a report out that says RIMM’s September sell-through numbers are looking “slightly disappointing” ahead of the new product launches. This was on top of a “flat” August.

There are too many variables to consider a trade for RIMM, especially with earnings coming out. To me, it is looking as though RIMM’s new products are going to have a bigger impact on the company’s next quarter, not this one.

Worldwide smartphone sales grew nearly 16% in Q2 from a year earlier and smartphones control about 11% of the mobile device market. That’s good news for RIMM because it shows there is still plenty of market share to capture. However, with so many competitors coming into the fray, RIMM will be fighting for that market share with the likes of Apple (AAPL, $131.05, down $9.86) and even Google (GOOG, $430.14, down $19.01).

The stock hit a low of $88 on September 18 which tested multi-year support. I profiled a RIMM strangle option trade earlier this month that netted us a 35%-40% profit. I would almost go out on a limb and recommend the same trade but it’s just too risky. The recent low has me leaning towards RIMM testing those lows again but a good earnings report may help the shares from sinking.

Rick Rouse
Rick@OptionsMentoring.com

Anheuser-Busch (BUD, $66.69, down $0.46) has been trading 5%-10% below its takeover price of $70 a share and I wanted to point out what this means. In late June and early July, this was a hot topic for the blog and many of you did well with some of the option trades I profiled.

Having said that, although there are no option trades that I would recommend right now, BUD is perhaps one of the best risk arbitrage plays out there in the market. InBev has agreed to purchase the shares of Anheuser-Busch for $70 per share and typically, until an acquisition is completed, the stock of the target typically trades below the purchase price.

An arbitrageur (love that word) is someone who buys the stock of the targeted company and makes a gain if the acquirer ultimately buys the stock.

Brazilian antitrust regulators have already approved without restrictions the sale of Anheuser-Busch to InBev so there’s a really good chance that the $70 a share will happen. The stock traded as low as $63.50 last Wednesday and Thursday and if we can get back to those levels, I think you should pull the trigger on a stock trade.

Rick Rouse
Rick@OptionsMentoring.com

With a lousy market you can get lousy stock prices. At least that what a few companies are thinking. Although we had an 800 point rally to close the week, there are a few companies who feel like the market has given them the opportunity to buy back shares of their company stock.

Microsoft (MSFT, $26.01, up $0.85) said Monday its board approved a plan to buy back up $40 billion of its shares. The company said it has completed its previous $40 billion stock repurchase program and the new buyback expires in September, 2013. The company also raised its quarterly dividend to $0.13 from $0.11.

Although I don’t actively trade options on Microsoft, I have mentioned that at $25, Microsoft is a good stock trade to ride to $27 or $30.

Hewlett-Packard (HPQ, $47.75, down $0.51) also approved the repurchase of up to $8 billion in shares. The buyback comes on top of a previous $8 billion repurchase program started in November that has about $3 billion remaining. The company has about 2.5 billion shares of common stock outstanding.

And finally, Nike’s (NKE, $63.85, up $0.15) board approved a four-year, $5 billion buyback program. Their repurchase program will begin following the completion of its current $3 billion buyback program. Nike had about 492 million shares of “Class B” stock outstanding.

This is usually a bullish sign for the market when companies come in and buy their stock back. It shows the faith that management has in its stock price. Buybacks lower shares that are available to trade and could help increase earnings because of higher revenues on less shares outstanding.

Rick Rouse
Rick@OptionsMentoring.com

When you trade options there are many routes you can take but one of my favorite trades to use in a really volatile market are the strangle option trades. The best part of a strangle option trade is that they have unlimited profit with limited risk. The strategy can be used when you believe that an underlying stock will experience significant volatility in the near term.

When you do a strangle trade you buy both a slightly out-of-the-money call and put of the same underlying stock with the same expiration date. For instance, if a stock is at $80 and you think it is going to move 10 points either way, you would buy one call option with a strike price of $85 and a put option with a strike price of $75. Or, if you think the stock is going to move 20 points you could do a $90 call strike and a $70 put strike price.

You can get some pretty big returns with the strangle option strategy when the underlying stock price makes a very strong move either upwards or downwards by the expiration date.

The maximum loss for the strangle option trade is the amount of money you paid for both the call and put option. This is hit when the underlying stock price trades between the strike prices of the options bought from the time you buy them up until the expiration date. At this point, both options expire worthless and you lose your initial cost although you can close the trade early so that it is not a total loss.

It works like this. Suppose ABC’s stock is trading at $50 in September. You could do an option strangle by buying an October 45 put for $100 and an October 55 call for $100. The cost to enter the trade is $200, which is also your maximum possible loss.

If ABC’s stock rallies and is trading at $60 on expiration in October, the 45 put will expire worthless but the 55 call expires in the money and has an intrinsic value of $500. If you subtract the initial cost of $200, your profit comes to $300, or a 150% return.

However, if by expiration in October, ABC’s stock is still trading at $50, both the 45 put and the 55 call will expire worthless and you would suffer a maximum loss if you didn’t close the trade early.

There are other potential outcomes of this trade. It is possible that a stock could move sharply one way and then reverse course and head back the other way making both sides of the trade profitable. We’ve seen this happen with a few stocks I have profiled in the blog. The point is, when the market is trading the way it has been lately, there are other option plays that you can incorporate into your trading arsenal to help offset some of the volatility.

Rick Rouse
Rick@OptionsMentoring.com

Ditto. The market is up ANOTHER 400 points shortly after lunch and for the week the Dow is actually positive. In a week that will go down as one of the most volatile we have seen in quite some time, the market has rallied in stunning fashion on more good news that the government plans to wipe off billions and billions of bad debt off the banks books.

Another factor helping to propel the market higher is the new ban on short selling. I knew the short sellers would eventually get nabbed and today they are paying a heavy price. The SEC placed a temporary ban on the short-selling of nearly 800 financial stocks.

Short-selling is when you think a stock’s price will fall and you borrow the stock from someone else then sell the shares in the open market.

I haven’t even mentioned that today is “quadruple witching” day.

In fact the news is so good right now I can’t believe I waited this long to tell you about Morgan Stanley (MS, $29.60, up $7.05) and Wachovia (WB, $19.40, up $4.90).

Morgan went on a wild ride yesterday and by the afternoon the stock had dipped to a low of $11.70 after hitting a high $24.82. Stop and think about that for a minute. Morgan went from $24 to $12 to now nearly $30 in 24 hours…

I profiled the October 20 calls (MSJD, $10.90, up $3.70) which were at $5 and have now doubled and traded as high as $13.40. The January 25 calls (MSAE, $8.85, up $3.95) were at $4.00 and were over $10 earlier today. I don’t now much higher Morgan can go because the run-up has been huge. You could set stops at $10 for the October calls and easily get taken out due to volatility. You could set one a $7 to allow for some of this but also risk not taking a “double” off the table. Note: I always set stops at a double once the trade is officially over 100%.

Wachovia shares are up over 35% today and the longer-term call options we profiled are also doing well…real well. Wachovia actually OPENED at $23.86 and hit $24. I was pounding the table, beating the drum, and hollering at the top of my lungs that Wachovia was a serious buy-out candidate. The returns on the call options are also incredible.

The January 15 calls (WBAC, $5.80, up $2.48) were at $1.40 and have traded as high as $9.00. The January 20 calls (WBAD, $2.50, up $1.05) were at $0.65 and have traded as high as $4.50.

Obviously you should have closed some of these positions today to protect your profits and keep your bankroll growing. I’ll be wriiting articles here on the blog starting this weekend and my goal is to educate you on numerous option strategies and tidbits on the market. We might even do a mailbag…send me your questions.

Enjoy the rally but don’t fall in love it. As option traders we trade both up and down markets and this rally is being fueled by throwing gas on a fire. How long it burns remains to be seen.

Rick Rouse
Rick@OptionsMentoring.com

Incredible. Absolutely incredible. In a day that took more turns than a high speed chase, the market rallied in stunning fashion after reports that the government is coming to the rescue once again to help with the bad loans and mortgages that have crippled many financial firms.

There is nothing written in stone, yet, on any solution and the fact that the Fed added over $100 billion in short-term loans late in the day was all the market needed to get back over 11,000. The Dow officially finished Thursday at 11,019. (3.9%)

It’s hard to say what the outcome of all this will be and I’ll update you on the developments over the weekend but for now, the rally was good news for the bulls and even better news for the financial stocks.

The Nasdaq closed at 2,199, up 100 points (4.8%) and the S&P 500 ended at 1,206, up 50 (4.3%). The futures are up strong this morning so we could have another good day.

Rick Rouse
Rick@OptionsMentoring.com

The Dow has fallen into negative territory once again after rallying over 200 points earlier this morning. Since its high of 11,800 at the beginning of the month, the Dow has fallen over 1,200 points with 800 of that coming this week.

I’ve been mentioning the VIX (VIX, 37.74, up 1.52) lately and for those of you new to the blog, the VIX is the CBOE Market Volatility Index that measures market sentiment. The market has had a lot of downward momentum and when the market goes down, the VIX goes up. The value of the VIX decreases when the market heads higher.

If the VIX is at 30 or more then it means the market is nervous which is currently where we are at. The VIX closed at 25.66 and the Dow stood at 11,421 last Friday. You can see the rise in the VIX as we headed lower on the Dow this week.

If the VIX is at 20 or lower then it means the market is confident. There are no real catalysts for the market to head higher until maybe when the election gets into full swing. It’s possible the VIX heads into the 40’s as we close out September and head into October. Company earnings will be coming out in a couple of weeks and you can almost bet we are going to see even more volatility.

Although the VIX is not a tell-all sign on where the market is headed, it can be a helpful tool. The market is not out of the woods and it will be interesting to see if we can hit the mid 40’s on the VIX. If this happens there will be plenty of opportunities to go long with call options on certain stocks and sectors.

Rick Rouse
Rick@OptionsMentoring.com

Out with the old, in with the new. There will be a change in one of the Dow stocks as Kraft Foods (KFT, $33.31, up $0.66) will replace American International Group (AIG, $2.40, up $0.35) as one of the Dow’s 30 components. The change will take place next Monday.

Well, it’s about time. Although AIG does not have a big percentage weight on the Dow (currently at 0.16%) now, it’s freefall in its stock price did have an affect on the market. Thank goodness they replaced it with a food company rather than another financial stock (sly grin).

AIG is being removed because of the Federal Reserve’s $85 billion emergency bailout. Kraft was a “safe” pick and if you will recall, spun off by Altria Group (MO, $20.53, up $0.67). It looks like Warren Buffett has done it again. He is Kraft’s biggest stakeholder and controls about 10% of the company. Mr B. has about, oh, 138 million shares worth a cool $4 billion. Wow.

The Dow is staying above water, up 61 points to 10,671 but a lot of technical damage has been done. The VIX (VIX, 36.68, up 0.46) has spiked above 30 this week and that is usually a good sign that we may be nearing a bottom. However, it’s quite possible that the VIX could headed to the 40’s if the market continues lower.

Rick Rouse
Rick@OptionsMentoring.com

Morgan Stanley (MS, $18.10, down $10.60) is down $4+ from its opening price of $22.83 and $5 since my earlier blog. The opening price was nearly $6 lower from where the stock closed Tuesday. We are talking about a 35% drop in for a company that smashed Wall Street’s exceptations. Morgan announced early in an attempt to show the Street that it’s withstanding the financial turmoil that has dramatically affected Wall Street.

Morgan’s leverage ratios improved which is a good thing and both Morgan and Goldman Sachs (GS, $100.00, down $33.01) are performing far better than most other financial stocks despite declining profits. The thing with Goldman is that it is now trading a 1x book value. Goldman’s “supposed” book value is $99.

Yeah, it’s hard to trust the numbers but there is no more rulebook. The sell-off in some of these names are unbelievable. And while the sell-off can be swift from one day to the next, so can the rallies. Gold was up $50 to $829 this morning as the dollar was weakening.

The point is I think Morgan’s worth a flyer here at these levels and I’m looking at the October 20 calls (MSJD, $5.00, down $7.00) and the January 25 calls (MSAE, $4.00, down $4.18). Both calls have traded lower - the 20’s have traded as low as $4.40 and the 25’s have traded as low as $3.70. We could hit those levels again if the sell-off continues into the close but at some point the short-sellers are going to have to cover this stock.

Rick Rouse
Rick@OptionsMentoring.com