It’s official. After a week of haggling, the House finally approved the $700 billion government bailout of the financial industry on Friday with President Bush quickly putting his John Hancock on the bill. It was almost a foregone conclusion that the bill would get passed and the bulls on Wall Street were hoping for a snap-back rally but their hopes were dashed once the vote was approved. The market had been higher by 300 points heading into the tally but reversed course once the decision was announced.

The Dow finished Friday lower by 157 points to close at 10,325. The Nasdaq dropped nearly 30 points and closed at 1,947 while the S&P 500 fell 15 to settle at 1,099. For the week, the Dow lost 800 points. The “rally” that was suppose to follow after the approval of the bailout was wishful thinking by the bulls. The market gave us so many signs that there wasn’t going to be a rally as it quickly turned its attention on what lies ahead.

So what is next for the market? Of course, the big picture in the whole scheme of things is that the housing market will have to get better before we can ever have a sustained rally but the here and now will be earnings. Yeap, earnings season is here and they will start trickling in this week. The heavy-hitters, companies that will certainly move the markets, come in the following week.

As far as the financial stocks, they retreated as well. Goldman Sachs (GS, $128,00, down $3.54) was trading as high as $142 before falling 14 points after the announcement. The October 135 calls (GSJG, $6.90, up $0.10) were profiled on September 24 at $6.90 and reached a high of $12.00 before the sell-off. I’m sure we will be trading this one again.

JPMorgan Chase (JPM, $45.90, down $3.95) was also doing well heading into the bailout vote, trading over $50 but fell 8% afterwards. The October 47.50 calls (JPMJW, $2.20, down $2.40) were profiled at $2.75 on Wednesday and reached a high of nearly $5 before dropping 50%. I warned you of this on Thursday and if you didn’t take profits then or on Friday then shame on you.

There’s much to debate about the bailout but now that the market has gotten this out of the way, it’s all about earnings for the next few weeks. Expect much of the same volatility we’ve been seeing but remember, October is always full of tricks and treats when it comes to the market.

Rick Rouse
Rick@OptionsMentoring.com

I received a lot of emails on the JPMorgan Chase (JPM, $49.49, up $0.24) trade yesterday and this morning. First, thanks for writing and keep the emails coming. Many of the questions involved stop losses and targets and where the options I discussed are headed. I’ll go over a few quick reminders and what I look for in trades and we can go from there.

The market just opened and JP is slightly higher. The October 47.50 calls (JPMJW, $4.60, unchanged) could have been bought yesterday at the open for $2.75 and before the market closed they were up around 40%. The biggest thing here is that anytime the market gives up a 40%-50% profit in a day, most of the time it is best to take the quick profits and close the trade. It eliminates the greed and emotion we all can get.

Next is your entry prices and exits. If I buy an option for $2.00 a contract and I buy 10 contracts, I have got $2,000 tied up in a trade. I usually set my stop loss anywhere from 25%-50% below my initial investment. That means once my $2,000 investment starts to lose money and goes down to $1,000, I usually cut my losses. Done, no questions asked, move on to the next trade.

For every option trade, my goal is a 100% return. Now, like I mentioned in earlier notes, if you can get 50% in a day then take the money off the table. When I target 100% returns the trade can take anywhere from one to three weeks. However, sometimes stocks move faster than we expect and why risk the 50% you make in a day for maybe a 100% you might make in two weeks?

It was a tough call for many of you to close the trade on JPMorgan because it looked so strong going into the close. The October calls I mentioned still might double but remember it’s okay to take half the position off the table or even the whole thing when your profits grow that quickly.

Rick Rouse
Rick@OptionsMentoring.com

Historic times indeed. Tuesday’s 485 point climb for the Dow was the third largest ever after dropping 777 points on Monday. The Dow’s close of 10,850 puts the index down 18% YTD. The Nasdaq jumped nearly 100 points to close at 2,082 but its 5% jump still leaves it off by 20% YTD. The S&P 500 rallied 60 points to finish at 1,166 and is also down 20% for the year.

NewsFlash. Despite the market’s gyrations, there are a few stock out there making new 52-week highs. Tough times call for tough choices and when you have to sell something for money where do people go? Yeap, pawn shops are hot (no pun intended)…EZCorp (EZPW, $18.80, up $1.32) hit a 52-week high of $19.25. There was a little action in the October 17.50 calls (ULPJT, $1.95, up $0.90) which jumped 85% but open interest is relatively low.

Other stocks to add to our “Pawn Shop” watch list: Cash America International (CSH, $36.04, down $0.06) and First Cash Financial Services (FCFS, $15.00, up $0.27) are a couple of other players but their stock was hit by Hurricane Ike recently.

JPMorgan Chase (JPM, $46.70, up $5.70) did not set a 52-week high yesterday but the 14% surge has me believing it could be the one to “buy” if a bailout is approved. There was heavy action in the October 47.50 calls (JPMJW, $2.73, up $0.54). If you have some “house money” to play with you’re getting 50/50 odds. Either the financial stocks get a short-term lift with the bailout or they plunge even further.

Keep an eye on the HealthCare sector. One of my favorite plays could be UnitedHealth Group (UNH, $25.39, up $4.39) which has been slammed recently. There was huge volume in the October 25 calls (UHBJE, $1.50, up $0.20) but I’d go way out to the January 35 2010 calls (WUHAG) which closed at $2.05 if the stock can hold $20 for a few months. This would give us an entire year to play a rebound.

Other potential names include Aetna (AET, $36.11, up $0.85), Cigna (CI, $33.98, up $0.65), Humana (HUM, $41.20, up $0.50) and WellPoint (WLP, $46.77, up $2.31).

It’s a tough market right now but an exciting one. Novice traders will get “smothered and covered” in these types of markets and it’s best to leverage trades and take profits until we get back to “normal”. That might take a while though.

Rick Rouse
Rick@OptionsMentoring.com

Well, we all knew there would be drama when it came to getting the $700 billion banking bailout package approved by the government. Instead of fighting to get this thing done, both sides seem to be tripping over their own two feet to be the first in line to take credit for it. On Thursday, in what looked like a sure thing to get it passed, Republican lawmakers rejected the emergency financial rescue package last night after both parties pretty much had announced they were near an agreement on a deal. I guess that’s why they call it politics…

Anyway, as far as the market, we opened 150 points lower on the Dow this morning but as the day has progressed the market has rebounded but is still down 60 points. Part of the big drop at the open was news that the FDIC had seized Washington Mutual (WM, $0.16, down $1.53) on Thursday and then sold the assets to JPMorgan Chase (JPM, $44.30, up $0.84) for nearly $2 billion. Yeap, as Queen said it best…Another One Bites the Dust.

WaMu was the largest financial firm in history to collapse under the mortgage debt market and it shows just how serious the housing market has crippled our economy. Of course, the news isn’t earth-shattering by any means and it was almost excepted. WaMu joins the ever growing list of companies disappearing and I’m sure there’s more to come.

Wachovia (WB, $10.75, down $2.95) is getting a 20% haircut this morning as volume has hit 100 million shares. The options for Wachovia are also trading at a furious pace with huge positions being taken in the October 5 puts (WBVQ, $0.86, up $0.66, or 325%). Volume has swelled to 33,000 contracts thus far. The October 7.50 puts (WBVY, $1.50, up $1.05, or 233%) are also active. I’m not sure if Wachovia will trade down to $5 but there is growing open interest at the 2.5 through 10 October puts strike prices. We have traded Wachovia in the past but let’s stay on the sidelines with this one. Something doesn’t feel right with Wachovia anymore.

Change is good and and the way the market is acting it looks like it is smelling a deal. It still remains to be seen but we can almost bet the farm a deal will get done and that should help the market over the near-term.

Rick Rouse
Rick@OptionsMentoring.com