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

After weeks of failing to attract a buyer, Lehman Brothers Holdings (LEH, $0.21, down $3.44) played its last card on Monday and it wasn’t an Ace. Instead, the 158 year-old folded and filed for Chapter 11 bankruptcy. In a last ditch effort to try and save the company, the government and numerous banks failed to find a solution during weekend meetings. At one point, Bank of America (BAC, $26.55, down $7.19) was considering a bid for Lehman but the government urged it to buy Merrill Lynch (MER, $17.06, up $0.01) instead.

The fall from $67 to basically zero was fast and furious for Lehman after taking on too much exposure in the deteriorating mortgage and real estate markets. In the end after a last-ditch effort to find a buyer over the weekend failed, Lehman really had no other alternatives.

For those of you who kept the Lehman trade open from Friday, you might as well close it now because the puts have reach their maximum potential and the calls are worthless. The October 7.50 puts (LYHVU, $7.40, up $3.05) were profiled at $2.34 and easily tripled. This offset the October 12.50 calls (LYHJV, $0.02, down $0.27) which still made the trade a double. We were lucky to play Lehman one last time and it was well worth it. See ya’ Lehman.

Side Note: Harris Corporation (HRS, $45.60, down $3.89) will replace Lehman in the S&P 500 index on Tuesday.

Rick Rouse
Rick@OptionsMentoring.com

DryShips (DRYS, $58.47, down $3.06) has plunged through $60 and I wanted to update the trade from August 25. I mentioned quite a few stocks within the sector but targeted DryShips as a strangle option trade. This option strategy is created when you buy both a call and put with different strike prices but with the same expiration date on a stock. This play is profitable only if there are large movements in the price of the stock and that is what has happened with DryShips.

The stock was right around $70 and I penciled in at least a $10 move in the stock within a few weeks. At the time I said “the stock is volatile and it could test $60 before it tests $80 again.” Knowing this I put us in a trade to take advantage of the price move.

The October 80 calls DQRJP ($0.50, down $0.20) were trading for $3.60 and the October 60 puts (DQRVL, $6.30, up $1.70) were trading for $2.60 at the time. Together the total cost for both contracts was $6.20. The stock made it to a high of $74 a few days later which is when the calls should have been sold for about $5.50. The puts were showing a loss but we took profits on the calls. All we had to do was wait for the stock to fade which is exactly what is happening.

Now, if you sold the puts today for $6.30 our total for both options would come out to $11.80 ($5.50 for the call, $6.30 for the put). Our entry price was $6.20 so if you did close the put side of the trade today you would nearly double your money. Don’t make the mistake of holding out for a little more profit. Sure, the puts could keep going higher if the stock continues lower but the stock has already reached our target. Some people hold on to these types of trades because there is so much time left until the options expire.

What usually happens is that the stock remains volatile and investors give back a lot of their profits waiting for a 200% gain instead of taking the 100% gain. Don’t make this same mistake.

Here’s how the other stocks from the sector are doing for the day and since August 25: Diana Shipping (DSX, $23.22, down $1.01) was at $29, Eagle Bulk Shipping (EGLE, $21.55, down $1.00) was at $25.80, Excel Maritime Carriers (EXM, $25.98, down $1.37) was at $32.77 and Navios Maritime Holdings (NM, $8.22, down $0.36) was at $9.90. We’ve seen violent moves in many stocks this week and you gotta love the action.

Rick Rouse
Rick@OptionsMentoring.com

I’ve been getting a few emails on DryShips (DRYS, $71.18, up $0.09) lately and I though today would be a good time to talk about the stock. The company recently reported 2Q earnings of $300 million, or $7.10 a share, up from $111 million, or $3.12 per share, during the same period a year ago. Impressive results but they fell well short of Wall Street’s estimates.

DryShips results were helped by the sale of the three ships for a $136 million but when that was factored out of estimates along with “valuation of interest rate swaps”, the company really earned $152 million, or $3.60 a share. Wall Street was expecting an adjusted profit of $4.57 per share so they missed by nearly a buck.

The company is continuing with its fleet renewal and expansion plan to replace older ships with newer and larger vessels but the stock has been in a downtrend in recent months. After a rally that saw the stock hit a high of $130 back in October and $116 in May, shares have been hit especially hard on concerns of a slowing global economy and a future glut in the number of vessels potentially leading to lower spot rates.

The concerns are real but may be somewhat overblown as the worldwide boom in the consumption of physical commodities isn’t likely to come to a complete halt. In fact, we should see a pick-up in demand sooner rather than later and now may be a good time to take a look at the dry bulk sector. Other stocks include: Diana Shipping (DSX, $29.00, down $0.15), Eagle Bulk Shipping (EGLE, $25.80, down $0.43), Excel Maritime Carriers (EXM, $32.77, down $0.44) and Navios Maritime Holdings (NM, $9.90, down $0.17).

As far as DryShips, the stock is volatile and it could test $60 before it tests $80 again. The October 80 calls DQRJP ($3.60, up $0.10) and the October 60 puts (DQRVL, $2.60, unchanged) could be used as a strangle to take advantage of the price swings. If one side of the trade doubles, sell, and then you have a risk-free trade on the other side.

Rick Rouse
Rick@OptionsMentoring.com

Some of you may have scaled into the copper plays on Friday at lower entry prices from Thursday’s close thanks to the nearly 200 point rally in the Dow. I profiled some October and January call options and here is where they closed:

BHP Billiton (BHP, $69.54, down $1.35)
October 70 calls (BHPJN, $3.80, down $0.70)
January 80 calls (BHPAP, $3.40, down $0.50)

Freeport-McMoRan (FCX, $90.60, down $3.06)
October 100 calls (FCXJT, $4.10, down $1.40)

Southern Copper (PCU, $25.37, down $0.93)
October 25 calls (PCUJE, $2.20, down $0.65)
October 30 calls (PCUJF, $0.60, down $0.20)
January 30 calls (PCUAF, $1.45, down $0.15)

The October calls have 50+ days before they expire so we should be in good shape. The January calls do not expire until January 16, 2009.

Rick Rouse
Rick@OptionsMentoring.com

We created a Mining Watch List back on May 22 for a few companies that provided us with some trades to go long. By mid-June we were out and since then, all four of the stocks have been hammered to levels where I think it’s time to go long again.

I will list some call options that will require you to do your own homework because the only ones I really like are the copper plays. The other sectors like steel and aluminum have been hit but I think cooper is the better play. We will compare prices from May to where these stocks are now and go from there.

BHP Billiton (BHP, $70.89, up $1.42). The stock was trading at $92. The stock set a 52-week high of $95.61 on May 19 but it has been all downhill since up until now. BHP is the world’s largest miner and recently posted record profits of $15 billion on revenue of $60 billion for the quarter. However, it fell short of Wall Street’s estimates of nearly $16 billion. Although many now believe its bid for rival Rio Tinto (RTP, $388.60, up $10.01) may be in trouble, the stock may have bottomed. The October 70 calls (BHPJN, $4.50, up $0.60) and the January 80 calls (BHPAP, $3.90, up $0.80) were active today.

Alcoa (AA, $32.12, up $0.43). In a little over two months, Alcoa has dropped 10 points and is a stone’s throw from its 52-week low of $26.69. I don’t know if the sell-off in the stock is warranted but I do know that demand for steel hasn’t diminished totally. I’m still on the fence with Alcoa but the October 35 calls (AAJG, $1.25, up $0.11) were the most active in the October call chain.

Freeport-McMoRan (FCX, $93.66, up $2.57). This stock was at $117 and made it up to $127 before falling to a recent low of $75.81 on August 5. Since then, the recovery has been swift and fast. Take a look at the October 100 calls (FCXJT, $5.50, up $0.85) which jumped 18% today.

Southern Copper (PCU, $26.30, up $1.75) is another stock that we can add to our list. The stock has been taken down to attractive levels and we can play the bounce. The October 25 calls (PCUJE, $2.85, up $0.95) were up 50% today while the October 30 calls (PCUJF, $0.80, up $0.35) were up nearly 80%. Long-term bullish traders may also want to look at the January 30 calls (PCUAF, $1.60, up $0.45).

The market did well with oil going jumping over $5 today. The Dow ended the day with a 12 point gain and closed at 11,430, a 100 points higher off its lows. The Dow is 200+ points lower from where we started the week and I don’t think we will have a 200 point rally on Friday with all of the rhetoric going on right now. However, I do think it’s a good time to give copper another look.

Rick Rouse
Rick@OptionsMentoring.com

Oil prices are up $6 a barrel this morning, its highest level in over two weeks, as escalating tensions with Russia heat up. The price of oil is at $121 and change and could go higher if a disruption of supply to Western countries is forthcoming. As you know, I was in the camp of oil going back above $120 before it got to $100 but the turn has been on a dime causing a huge jump in gold.

Russia is outraged about a possible deal between Washington and Poland to install a missile defense system in Eastern Europe and those concerns took center stage today. The defense system is seen as a threat by Moscow and other factors such as Storm Fay, and a weaker dollar has added a lot of pressure on oil today.

People are waking up to the fact that this is a huge deal and the continued presence of Russian troops in Georgia could keep the fire burning for higher oil prices. Last Friday I mentioned the gold stocks with some January call options and was hoping to scale into a position as oil headed back up. However, these positions “gapped” up so the entry prices are a lot higher than they were. With the sell-off in gold many traders started taking positions last week and it certainly is paying off today. Here is a look at the action:

Barrick Gold (ABX, $36.39, up $2.68). The January 35 calls (ABXAG, $5.00, up $1.40) were at $3.10 on Friday.

Goldcorp (GG, $34.98, up $2.55). The January 32.50 calls (GGAZ, $6.00, up $1.50) were going for $3.30.

Gold Fields (GFI, $9.05, up $0.39). The January 10 calls (GFIAB, $1.10, up $0.25) were trading for 88 cents.

Newmont Mining (NEM, $45.01, up $1.76). The January 45 calls (NEMAI, $4.90, up $0.90) were profiled at $3.35.

If you got into these trades last Friday or earlier this week, protect your profits. No one could have predicted the $6 jump in oil this morning but the Goldman Sachs (GS, $154.55, down $3.70) call of oil at $150 is looking like a real possibility if the tensions with Russia don’t ease.

Rick Rouse
Rick@OptionsMentoring.com

The ride for the financial stocks has accelerated to the downside over the past few weeks and some big names are trading near 52-week lows again. We all know that there are some trading opportunities that come with these names and we have played them both ways.

The option gains have ranged anywhere from 50%-100% and we have used both calls and puts. I’m not sure if it’s time to go long again but here’s what we’re watching:

Citigroup (C, $17.13, down $0.06) hit a high of $20.50 a week ago and is down 15%. The January 20 calls (CAD, $1.37, down $0.12) were profiled at $1.25 and sold at $2.60 the first time around. Let’s target an entry price of $1.25 again.

Merrill Lynch (MER, $23.65, down $0.15) has been good to us on the long side so far but it remains a question mark if we can go long again on this company. We made a 50% profit buying the January 35 calls (MERAG, $0.87, down $0.06) at $1.90 and got out in the $2.65-$2.75 range. There’s no way I’d get back into these particular calls but I’m feeling like Merrill has more skeletons in the clost. The January 25 calls (MOJAE, $3.55, down $0.05) look expensive to me and Merrill looks like it’s wants to go below $20.

A week ago, Fannie Mae (FNM, $5.02, down $0.98) was at $9 and Freddie Mac (FRE, $3.44, down $0.73) was at $6. These two have been the headline makers again and have dropped roughly 50% on renewed concerns of a government bailout. The option activity is insane for Fannie and Freddie and the jury is still out on wheather or not they survive. The Fannie May January 5 calls (NJWAA, $2.40, down $0.60) would be a monster trade if Fannie can get back to $10. The Freddie Mac January 5 calls (FREAA, $1.20, down $0.15) would double if Freddie trades up to $7.50. That is a big “if” for both of these trades.

Wachovia (WB, $13.99, down $0.31) is back below $15 and we made a 50% profit on the January 15 calls (WBAC, $3.00, down $0.30) at lower levels. Out of all of the financials, I like Wachovia the best and still think it will be the first to go as far as an acquisition target. If Wachovia can back to $20 these calls could double.

There are plenty more brand names out there to trade in the financials. Lehman Brothers (LEH, $12.60, down $0.47) looks cheap down at these levels. The January 20 calls (LYHAD, $1.40, down $0.15) look mouth-watering. I’d buy them here and try to sell them at $2.00 for a quick 40% profit.

Pick your entry points for these plays carefully and set stops early on any gains.

Rick Rouse
Rick@OptionsMentoring.com

We might as well get accustomed to talking about oil on a regular basis, as if we haven’t already, right? There are so many things that oil effects right now that change has become inevitable to find cheaper, alternative fuels. That’s a good thing as far as trading oil goes although I believe the change should have happened 15-20 years ago.

Ten years ago the hype was fuel-cell battery stocks and look what they have done. Wall Street was banking on names like Ballard Power (BLDP, $4.46, down $0.09) and Fuel Cell Energy (FCEL, $7.62, down $0.27) to carry us to a new wave of energy investments. In March 2000, Ballard was trading at $130 a share and Fuel Cell Energy was going for nearly $50 the same year.

Of course, 10 years later there are now dozens more companies that do the same thing that Ballard and Fuel Cell have been involved in for years. The point being is that oil was around back then, still is today, and will be in the future no matter what technology brings.

As far as today’s oil prices, oil set a record high of $147.27 on July 11. Yesterday, oil jumped above $115 per barrel as Tropical Storm Fay approached Florida. The storm is not expected to disrupt operations in the Gulf of Mexico but nonetheless, the market was nervous yesterday. Oil finished the session at $112.87 a barrel.

The recent retreat has given the market a boost over the past month but we didn’t start the week off on a good note. Oil has been a problem for the market in the past and it seems like the latest rallies are stalling because of the financial companies. Even if you’re not the gambling type, a small bet on higher oil prices could actually lower the risk of your portfolio, since the price of oil has lately tended to move inversely to stocks and bonds.

But that’s not the trend right now. Lots of traders have been betting on lower prices and some have done well while others have been scorched. With so much action around us, I wanted to mention a couple of ways that traders are playing oil.

If you are an oil bear and think oil is headed lower you could trade the ProShares UltraShort Oil & Gas (DUG, $39.35, up $0.97) ETF (exchange traded fund). When oil falls, the shares go up. DUG is currently above its 200-day moving average and began moving higher in early July. If you want to double your bet you could also take a look at the new Powershares DB Crude Oil Short (DBO, $42.88, down $0.38) ETN (exchange traded note).

If you are a oil bull and think oil is headed higher you could go with the U.S. Oil Fund (USO, $91.26, down $0.54) which tracks prices of West Texas light, sweet crude oil. You could also take a look at the iPath Crude Oil ETN (OIL, $67.15, down $0.66) as well.

All of these ETN’s and ETF’s have options you can trade so play on paper first if you don’t understand them.

Rick Rouse
Rick@OptionsMentoring.com

Wow. Just when it appeared gold was “off to see the wizard..” and was headed for $1,000 an ounce it is now trading for under $800 an ounce. The 20% drop has happened in just six weeks. On July 1, gold was going for $940. This morning, gold was trading at $795. There is support for gold at $770-ish, but a break below $770 could take the precious metal down to $750.

Meanwhile, oil is down 25% from its high of $147 a barrel as it is going for $111. I had mentioned the $110 level as a battle line but I’m in the camp of oil going back to $120 before it tests the $100 level.

Then there is the dollar. In dollar has hit a six-month high versus the euro as the currency was down 0.7% to $1.47. The dollar has gained 5% this month and continues to rally as inflation will restrict the Fed’s ability to cut rates. The weaker growth in Europe has started to hit the euro hard and it could get worse before it gets better for the euro.

A firmer dollar typically pressures gold which is often seen as an alternative investment or safe haven to the U.S. currency. A stronger dollar also makes dollar-priced commodities more expensive for holders of other currencies. They work hand-in-hand and it’s good to know these things. When the market was tanking in early July and oil was rising, we were able to hop into the gold stocks for a quick bullish play on gold. We set stops, made money and got out.

I’m not ready to go long just yet on the gold stocks or call options but there will come a day when we do. Just be patient. Take a look at our gold watch list and see where we were then compared to now. The comparisons are from July 1 and the options are the ones we will watch. Do not take any action, yet.

Barrick Gold (ABX, $32.49, down $1.09), was $46. January 35 calls (ABXAG, $3.10, down $0.60).

Goldcorp (GG, $29.95, down $0.97), was $48. January 32.50 calls (GGAZ, $3.30, down $0.70)

Gold Fields (GFI, $8.83, down $0.26), was $12.70. January 10 calls (GFIAB, $0.88, down $0.17.

Newmont Mining (NEM, $41.92, down $0.98), was $53. January 45 calls (NEMAI, $3.35, down $0.60).

It will be interesting to see if the market can hold its recent rally if oil heads back up. Over the short-term, I still see a firmer dollar and lower oil prices. This means the outlook for gold remains cloudy.

Rick Rouse
Rick@OptionsMentoring.com