Chesapeake Energy (CHK, $23.32, unchanged) managed to escape the market’s bad day and finished the session even. I had mentioned a short-term trade Monday morning when the stock was at $22.32 and the target for one of the option plays was almost triggered.

The November 25 calls (CHKKE, $2.20, unchanged) were trading for $2.10 at the time of the blog and I said the stock had a chance of getting to the $24-$27 range quickly. Today the stock hit a high of $24.61 and the calls hit a high of $2.90. I had predicted $3.00 and some of you may have left the trade open in hopes of getting that target.

If you held onto the call options then I can see why but remember when we get that close to a target, it’s okay to cash out. So the gain wasn’t 50%, it was 45%. There is a difference between 45% and 50% but the point I’m trying to make is that when you get that close to a target price, don’t get greedy, especially in this market.

I think the November calls still have a shot at $3 again and I would continue to hold them and the January 25 calls (CHKAE, $3.90, unchanged) which were profiled at $3.70. They hit a high of $4.40 today. Target $6 or better for the January options with a stop of $3.00.

Rick Rouse
Rick@OptionsMentoring.com

It has been tough to watch Potash (POT, $73.36, down $8.18) fall from $240 in June to below a $100 by October, then watch it fall below $70 to a 52-week low of $66. I was on the bull train on the way up to $200 from April through June and even before then. Since July though, we have been standing on the sidelines in hopes of the stock finding a new bottom.

In September when the stock was at $150, I mentioned how it was looking “attractive” but that if it failed $145, Potash could be headed much lower. On October 2, one of my blogs that day was “Potash Going Up In Smoke” with the stock at $97. Two days alone last week the stock went from $105 to $116 to $76. That should be enough to scare anyone away from being bullish but I think we are finally setting up for a good option trade in Potash.

I could bore you with the numbers and tell you what the company is going to make over the next few years or tell you how the price of potash fertilizer is still going for $1,000 a metric ton. The stock is cheap with a forward P/E (price-to-earnings) of 3 but valuations mean nothing in this market. At least not right now.

Just because the stock looks cheap doesn’t mean it can’t go lower. Plus we are in a market that no one trusts and that will take time. Having said that though, I do believe that Potash can rebound from these levels.

The November 80 calls (PVZKP, $6.90, down $4.60) fell 40% today and you could start your research there for a possible trade or you can look even further out. The 2010 January 180 calls (WPTAW, $4.00, down $2.50) also lost about 40% but they do not expire until January 15, 2010 - or 16 months from now. The high for these calls? $96. I’m not saying that these calls will go from $4 to $96 by the time they expire but there was some interest in these options today as nearly 400 contracts traded.

Rick Rouse
Rick@OptionsMentoring.com

American Express (AXP, $25.58, up $1.23) is having a decent morning after reporting earnings that fell year over year but still beat Wall Street’s expectations. After the bell Monday, the company said profits came in at $815 million for the quarter, or $0.74 a share, versus $0.94 a year ago. Analysts had expected $0.59 a share.

Amex had warned back in July that it could see higher late payments and defaults on its credit cards due to rising unemployment and falling home prices. However, its return on equity came in at 28% which is remarkable given the current environment. The firm did warn of higher loan losses in the coming quarters but will try and offset some of that by cutting costs.

The 52-week low for American Express is $20.50 and by no means is the company out of the woods. I wouldn’t buy any call options just yet but if you bought 100 shares of the stock at current levels, you could sell the January 27.50 calls (AXPAS, $2.60, up $0.05) to reduce your cost to $23.00. If the stock gets “called” away from you in January at $27.50 your return would be 20%. If not, you could continue to sell out-of-the-money calls to reduce your cost while you wait for a rebound.

Rick Rouse
Rick@OptionsMentoring.com

We have a big week of earnings and Apple (AAPL, $97.26, down $0.14) will get things rolling on Tuesday. The stock hit a low of $85 on October 10 and rebounded to $116 a few days later which shows that the volatility can be extreme.

There are various opinions on what type of numbers Apple will report but here is an idea. On average, Wall Street is expecting $1.11 a share on $8.1 billion in revenue. They expect 2.9 million in Macs sold, 4.5 million for iPhones and 10.5 million in iPods.

I would expect that the Mac numbers will come in better-than-expected as well as the iPhone number. A recent trip to Atlantic City only verified the number of iPhones being sold, in my mind. They were everywhere. The iPod sales should be slightly better given the huge cut on the iPod Touch from $399 to $229. If all these stars align, Apple will beat estimates.

The key, of course, on whether Apple will trade higher after announcing earnings will be its guidance. The company always seems to simmer Wall Street’s expectations by guiding lower and usually that has hurt the stock in the past. Maybe things will be different for a day or two and Apple can enjoy a nice rally like the good ol’ days.

The November 110 calls (QAAKB, $4.85, down $1.40) might be a good bet if you are bullish but they are expensive. Volume has passed open interest today so investors are expecting a big move out of Apple. The November 90 puts (QAAWR, $6.05, down $1.90) are also active as bears could be thinking Apple will test its lows again.

Either way, I think there are better trades out there but Apple looks poised for a significant move higher of lower over the next few days. Today’s action is mild but the behind-the-scenes option market is showing something different.

Rick Rouse
Rick@OptionsMentoring.com

Chesapeake Energy (CHK, $22.32, up $1.85) is rebounding this morning following this month’s sell-off. There are numerous factors that have brought the stock down from $35 to a low of $11.99 but investors seem to be building positions in hopes of a recovery.

One of the biggest reasons for the decline is the fact that the company’s CEO (and largest shareholder) was forced to sell most of his 5% stake in the company after a margin call. For those of you who don’t know what a margin call is, it’s something you don’t ever want to have happen to you. Basically, it is when you buy stock with borrowed money and are “forced” to liquidate your position because the stock is going lower.

Chesapeake is the nation’s largest natural gas producer and because it’s stock price is considered “low” there are already takeover talks swirling. There is also concern that the company could have trouble getting financed although it does have $1.5 billion in cash. Chesapeake did secure a new $450 million line of bank credit and is seeking up to $750 million to stay cash flow positive.

The company plans on maintaining its aggressive drilling plan which I think is a good idea and it wouldn’t mortgage its future without a plan. Chesapeake has a 52-week high of $74. I don’t think the stock is going to zoom back that high any time soon but I do think it could get back to the $24-$27 range over the near-term.

The November 25 calls (CHKKE, $2.10, up $0.55) are up 35% today and opened at $2.05. The low has been $1.80. I think they have a shot at trading up to $3 before the options expire which would be another 50% gain from current levels. The November options expire November 21.

For those of you who want to go further out, check out the January 25 calls (CHKAE, $3.70, up $0.90) which do not expire until January 16, 2009.

The options are a little expensive because of the volatility but these are short-term plays designed to take advantage of a rebound.

Rick Rouse
Rick@OptionsMentoring.com

Here’s an update from the lottery plays I profiled last Monday:

Entry Exit Current Action Expiration

Microsoft (MSFT, $23.93)
April 25 calls (MSQDE) $2.35 $2.90 $3.00 Hold 4/17/09

Google (GOOG, $372.54)
March 500 calls (GOPCO) $11.50 $15.00 $17.00 Hold 3/20/09

Yahoo (YHOO, $12.90)
January 17.50 calls (YHQAW) $1.30 $1.20 Buy 1/16/09

J&J (JNJ, $62.65)
Nov 60 calls (JNJKL) $3.30 $6.60 $4.70 Sell 11/21/08
April 70 calls (JNJDN) $1.50 $3.00 $2.75 Hold 4/17/09

Goldman Sachs (GS, $114.30)
January 125 calls (GSAE) $7.25 $15.00 $10.90 Hold 1/16/09

**Microsoft has a 25% stop above the $2.35 entry and would be attractive if the calls fell back to $2.35.

**Google had a sweet Friday, up nearly $20 for the day and hitting a high of $386 in the process. The October strangle two-day option trade was a huge success as it returned 100+%.

**Yahoo spiked to $13.73 on MSFT talk and the calls hit $1.50 before fading. I will be miffed if Yahoo is still solo by the end of the year.

**Johnson & Johnson was an awesome trade for the November calls and I don’t recommend any new positions in them as they returned 100% before slipping to current levels. The April calls still look good.

** Goldman Sachs rallied to $128 last Tuesday and the October 100 call options were a monster trade returning well over 100%-200% gains!

**Arch Coal (ACI, $24.15), Massey Energy (MEE, $23.30) and Patriot Coal (PCX, $16.61) were all stopped out with 20%-25% gains but I wouldn’t be a buyer of the November options anymore so I didn’t even list them.

Rick Rouse
Rick@OptionsMentoring.com

Google (GOOG, $353.02, up $13.85) turned in a fantastic report card after the bell on Thursday. The company beat Wall Street’s expectations by announcing earnings of $1.35 billion for the third quarter, up 26% from a year ago. Earnings per share were $4.92, which was 17 cents above estimates of $4.75. The stock was up over 10% in after-hours trading to $390 which could set us up for a nice open this morning.

The news is great for a number of reasons. I was anticipating good Google numbers but the market allowed us to play a strangle on Google which made us a sweet return.

The stock traded to a low of $309 on Thursday which allowed us to exit our October 290 puts (GGDVR, $4.10, down $0.10) at $9 or better as they traded to a high of $13. That was more than a 50% gain from our entry point on both the put and call option.

The October 400 calls (GOPJT, $6.10, up $2.10) were at $1.80 when Google hit its low for the day and we kept these open since the puts had already made our trade a winner. The market got a lift in the afternoon session and Google started to rebound which helped the calls recover. Expect a big, big move in these options if Google can hold its $37 after-hour gains. Even if you closed the puts at $10, the calls rebounded enough to already make this trade a double.

Our entry price for both options was $8.50 and we are looking at $16 before the market even opens ($10 for the puts, $6 or better for the calls).

The March 500 calls ($15.60, up $1.60) which I mentioned on Monday at $11.50 should also do well. The went on a wild ride yesterday, trading to a low of $9.80. Some of you may have even taken this trade again if you had a stop of $15.

The government may be printing money like its going out of style to help the market but its a great thing for option traders. This is the best option trading market we may ever witness. Take advantage of it.

Rick Rouse
Rick@OptionsMentoring.com

Like Ike and Tina Turner, Microsoft (MSFT, $22.72, up $0.06) and Yahoo (YHOO, $13.39, up $1.64) can’t seem to stay away from each other. It seems Microsoft’s CEO, Steve Ballmer was quoted as saying a Microsoft acquisition of Yahoo would still “make sense economically.”

I’ll bring you more on the story later but it’s great news for the Yahoo options. The October 12.50 calls (YHQJV, $1.10, up $0.75) are well up over 200% on the news…but I didn’t recommend that one.

Over the weekend, I mentioned how Yahoo not taking the original $30+ deal could haunt shareholders forever. It’s clear what Microsoft’s new plan of attack is. They are trying to take advantage of Yahoo’s cheap share price and the turmoil in the market. I can’t say I blame Microsoft. As a matter of fact, like a Guinness beer commercial, it’s brilliant!

The January 17.50 calls (YHQAW, $1.40, up $0.40) are up 40% on the news but only slightly from where they were profiled. I doubt anything serious will come from this in the next day or two because I don’t think Ballmer would have said anything if that were the case. But it does mean that Yahoo is still on his mind despite saying it’s over. Although it has been confirmed there have been no “new” negotiations, Microsoft still wants Yahoo.

What’s love got to do with it? It’s business baby.

Rick Rouse
Rick@OptionsMentoring.com

Yesterday I mentioned a quick strangle trade on Google (GOOG, $323.66, down $15.51) and 24 hours later the trade is showing a 30% profit. Google is set to announce earnings after the bell so we can expect more volatility.

The October 400 calls (GOPJT, $2.40, down $1.60) were at $5.10 and the October 290 puts (GGDVR, $9.00, up $4.80) were at $3.40. It would have cost $8.50 to buy both option contracts or $850. At current prices, together they are worth $11.40. Basically, because of the market’s volatility we have been able to make over 30% in one day. The puts have actually traded above $13 this morning when Google hit $309.

If you closed the puts this morning, you could have netted a 50% return on the trade AND you would still have the calls to play Google’s earnings after the bell.

I had penciled in a 60 point move in Google and figured an 8%-10% gain for a two-day trade. Well, we got 40 of that and the trade has been a bigger winner. Maybe, just maybe, Google can knock the cover off the ball and report a good quarter that will take the stock higher. If so, the trade could return over 100%.

Rick Rouse
Rick@OptionsMentoring.com

After taking one big step forward, the market took two steps back on Wednesday as the Dow fell 733 points, or 7.9%, to close at 8,577. Of course, we are not surprised because we have been preparing for it. Yesterday’s downfall was blamed on bad retail sales data as September sales tumbled 1.2% month-over-month. Biggest drop in three years. The news was a shocker for Wall Street as it was a larger than expected drop. Know-it-alls predicted a decline of 0.7%.

As far as the indexes, the Nasdaq took a 8.5% hit and finished lower by 150 points at 1,628. The S&P was hit harder than a Vegas hangover, falling 9%, or 90 points, and closed at 907.

The Dow’s low last Friday was 7,773. For the Nasdaq it was 1,542 and for the S&P it was 839. So far we’ve been right-on in calling this market and we have prepared for a bottom, played the bounce, and now we must get ready for the possibility of testing those lows again. Remember, I keep telling you October will continue to be like this. That is why we are taking half positions over the short-term/ long-term and cashing in on profits by keeping tight stops.

As far as the bounce, it was good for a quick trade in Microsoft (MSFT, $22.66, down $1.44), Google (GOOG, $339.17, down $23.54) and Johnson & Johnson (JNJ, $60.54, down $3.46), Morgan Stanley (MS, $18.13, down $3.81) and Goldman Sachs (GS, $113.15, down $8.75). Keep an eye on the calls I have mentioned. Some of them are still higher but they may get cheaper. So here is the game plan.

First, if you take any positions, only start with a half position. What that means is that if you normally buy 10 option contracts at a time, buy five. The market keeps showing signs of another breakdown and to me, that would be the best thing that could happen.

Of course everybody is going to question the bailout package but the market needed to do its own cleansing and needed to make its own low before Congress jumped in. The truth is that Bush didn’t want a crisis and they wanted to jump start the market because it was at multi-year lows. But the reality is the market has to make a bottom on its own.

I studied charts until I was light-headed last night and here is my best/ worst case synopsis. I’ve already been calling for this decline since August before we hit last Friday’s lows. In fact, in the October 7 blog with the Dow at 9,447, here was what I mentioned:

“I’m not making any predictions on how low the Dow can go because on any given day we could get some kind of “miracle news” that takes the Dow higher by 1,000 points but from my study of the chart for the Dow, it looks like we could test 8,300. That’s another 1,000 points lower. From there it gets real ugly.”

Well, we got that and then some, son. I only repeat myself a thousand times because, again, I want to make you aware of what type of market we are in. You have to have a quick trigger and know what is happening. Having said that, there is support at 7,200 for the Dow but that’s another 1,300 points lower.

Although the talking heads thought last Friday’s 7,700 level was “the” bottom, some research will shed a different light on the subject if you are willing to do a little homework. This market can float like a butterfly and sting like a bee, that’s for sure. But it’s up to you to stay on your feet so that you can beat the Street. Don’t fall in love with any positions (yet). We still have earnings and October options expire next Friday.

Drumroll please…it’s possible we test those lows for the Dow (7,200) by next Friday with the hope of the market rallying afterwards.

Rick Rouse
Rick@OptionsMentoring.com