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

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

The market opened with a bang on Tuesday as Wall Street got excited that Hurricane Gustav did not cause any significant damage or oil-supply disruptions over the holiday weekend. However, by the end of the day the Dow gave up a 250-point gain and ended the session down 26 to 11,516. Like a roulette wheel going from black to red, the market’s fortunes seemed to change on one spin yesterday. It wasn’t really the financial stocks this time around that did the market wrong, the Dow is simply running into very strong resistance at 11,800.

The S&P 500 jumped 25 points to 1303 but ended the day at 1,277, down five. The Nasdaq had gained over 45 points to 2,413 before finishing at 2,349, a drop of 18. Same story here. Both indexes tested serious resistance levels - 1,320 for the S&P and 2,450 for the Nasdaq.

Oil fell to a low of $107 before settling at $109 and change. While this was great news for the market, Gold got absolutely hammered. At one point, the yellow metal was down $40 and ounce but managed to close above $800 ($810.50 to be exact). Still, a $25 drop was worth mentioning. Of course, this was bad news for Gold stocks but good news for us. We have played the Gold bounces before and we are getting close again to playing another one.

September is historically a “not so good” month for the market and October follows. And we all know that some of the biggest market crashes, ever, have happened in October. Anyone remember October 19, 1987, other wise known as “Black Monday”? That was the day the Dow fell over 500 points, or 22%, to finish at 1,739. A crash of that magnitude would be like a 2,500 point drop for today’s Dow. That seems a little far fetched, huh? Now, I’m not saying that the market is going to crash or that we are going much higher from here but it’s important to step back and analize things.

Two years later (October 13, 1989) the market also suffered a “mini-crash” as the Dow fell nearly 200 points, or 7%, to close at 2,569. Back then, the debacle was blamed on a failed leveraged buyout involving UAL Corporation and United Airlines which was its parent company. Also adding fuel to the fire was the collapse of the junk bond market.

We have had a few “crashes” since then but you get the picture. With the mortgage mess the way it is, and the finacial stocks acting the way they are, all I am saying is that anything can happen. That is what makes the market so freakin’ awesome. We could bust through resistance and go on to new highs, stall at current levels and fade, or simply crash and burn. I certainly hope the latter doesn’t happen but as hard as it is sometimes, sometimes you have to “think outside the box.” You always have to remember the market doesn’t care what side of the trade you are on.

This ought to get interesting…

Rick Rouse
Rick@OptionsMentoring.com