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

It’s been a rough month for Gold and it continued yesterday with the price falling $9 an ounce to $908. Other metals traded lower as well. Silver tumbled $0.38 to close at $17.14 a pound, while Platinum fell $92 to close at $1,563 an ounce. Copper dropped $0.14 to $3.44 a pound and Palladium dropped $16.70 to end the day at $354.40 an ounce.

Oil is below $120 this morning which is pushing the Dow higher by 160 points to 11,445. With the price of oil dropping, the dollar will continue to rally. That’s not good news for Gold stocks as many of them are trading lower this morning. We had a little success with Gold stocks at the beginning of July and we able to make some quick profits of 10%-25%.

I’m not bullish on Gold at the moment…I’m not really bearish either. Trading options on Gold stocks can be a tricky business and we were able to make some money trading these types of options when the market was falling and oil was rising. A month later, we are in a different environment. Take a look at how much some of the Gold stocks have declined from July 1. I’ll also list some September options that we will be watching.

Barrick Gold (ABX, $38.32, down $1.70) was $46. The stock was recently upgraded from “Neutral” to “Outperform” by Credit Suisse at the $40 level but is down 4% this morning. The September 40 calls (ABXIH, $2.25, down $0.55) may be worth a look if they can get below $2.00.

Goldcorp (GG, $34.64, down $0.61) was $48 and has dropped 14 points in a month. The company reported a surprise $9.2 million loss for 2Q and lowered its production outlook for the rest of the year. The September 35 calls (GGIG, $2.65, down $0.45) have lost 15% today and may be a good buy at $2.25.

Gold Fields (GFI, $9.86, down $0.08), was $12.57. The stock is down over 20% in a month and is a better stock trade than an option trade at this time. The September 10 calls (GFIIB, $0.75, up $0.05) would double if this stock is at $11.50 by September 19.

Newmont Mining (NEM, $45.45, down $0.67) was at $53. The company reported a decent 2Q, posting a profit of $0.61 a share, compared to loss of $0.89 a share in the prior year quarter. Newmont has been making deals with other, smaller firms in an effort to expand its strategic alliances and those could pay off down the road. Watch the September 45 calls (NEMII, $3.05, down $0.55) and let’s see if they can get down to $2.50.

Although it doesn’t appear to be the case today, Gold stocks could be bottoming out after the steep drop in July. It’s unusual that we are getting such a huge rally before the Fed announcement and it remains to be seen what happens later in the day. The Dow has moved up another 30 points since I started this blog to 11,473. We’re looking at a 200-point gain in just over an hour-an-a-half as oil continues to trade below $120 a barrel.

Rick Rouse
Rick@OptionsMentoring.com