Apple (AAPL, $91.07, down $6.00) is below $100 and is tanking along with the rest of the market. The Dow is down 454 points to 9,871 and is below 10,000 for the first time in four years. I’ve been mentioning over and over that the market could be headed lower and that September and October could be brutal. Here we are with the good possibility of going even lower.

While everyone runs for cover, it’s important to remember what type of market we are in. We have had success by shorting the market and we’ve protected ourselves by leveraging our trades. With Apple, I mentioned on September 29 that we could see another big move as the stock was sitting right at $100.

The October 120 calls (QAAJD, $0.52, down $0.33) were at $5.85 and traded as high as $9.00 the very next day as Apple rebounded to $115. They should have been closed then which allowed us to wait for another breakdown in Apple.

The October 100 puts (QAAVT, $13.00, up $4.80) were at $5.35 and are up nearly 60% today as Apple has continued its breakdown. The puts have traded as high as $15.20 when the stock hit a low of $87.54 earlier this morning and should also be closed sometime today.

Even if you left the calls open, with today’s big gain in the puts the trade is still profitable. The total cost to enter the position was $11.20 for one call and one put. I was hoping for a 10%-20% gain so the trade has reached our target. If you closed out the call at $9.00 and if you close the puts at $13.00 today your return is nearly 100%. Either way, it’s nice to know some of you are making money.

I’ll be back tonight with a recap of the market. I’ve been mentioning the VIX (^VIX, 53.45, up 8.31) for a few weeks now and I said the index could be headed to the 50’s and maybe even the 60’s. We are getting close to a market bottom but calling a “bottom” is usually pretty tough. The market can get cheaper if people continue to panic which signals that we are going to be bargain hunting here shortly.

As I go to post this, Lehman Brothers CEO is testifying before a House Oversight Committee. This ought to be interesting…

Rick Rouse
Rick@OptionsMentoring.com

Merrill Lynch (MER, $19.43, down $3.87) shares were down again yesterday, falling 17% and hitting a fresh 52-week low of $18.50 in the process. The stock’s previous 52-week low was $22 and Merrill opened well below that at $20.68.

The bears were all over Merrill as they take aim in what could be the next investment bank to face questions about its survival. Lehman Brothers (LEH, $4.22, down $3.03) had a lot to do with Merrill’s decline yesterday but just last month Merrill had arranged to sell about $30 billion in bad debt to Lone Star Funds.

Merrill is expected to write-off as much as $5 billion as a result and has already written off more than $40 billion over the last year. The stock is in a freefall because it is seen as having similar weaknesses as Lehman.

Bad news for Merrill, good news for us. The September 25 puts (MOJUE, $6.00, up $3.42) were profiled at $1.30 are up 362%. The October 25 puts (MOJVE, $7.09, up $3.24) jumped 84% yesterday and were profiled at $2.56. They are up over 175%.

We had set a stop of $3.00 for the September puts. You can raise it to $5.00 or close out the position today. They expire next Friday, September 19. Raise the stop from $4.00 to $6.00 for the October puts.

Rick Rouse
Rick@OptionsMentoring.com

The Dow pretty much gave back all of its 290 point gain on Monday with yesterday’s 280 point drubbing. The market was nervous after it was reported that Lehman Brothers (LEH, $7.79, down $6.36) had failed to attract a buyer for some or all of its assets and it only got worse with the sell-off in Energy stocks. The Dow made it into positive territory shortly after the open but was back in the red within the first hour of trading. The decline picked-up pace in the final hour and when it was all said and done, all three major indexes lost well over 2%.

The Dow finished Tuesday’s session at 11,230. The Nasdaq fell 60 points, or 2.6%, and ended at 2,209. The S&P 500 took a 3.4% pounding, dropping 43 points to close at 1,224. I said Monday morning before the market opened and the futures were up big-time that although we were headed for a huge rally, it appears traders are selling into them. That was confirmed once again yesterday.

Another point is that we all know triple-digit gains are pretty much the norm these days but have you noticed that we are now getting 200 and 300-point up and down days on the Dow. It’s almost gone unnoticed by the general public because everyone seems to be scared of the market or is not interested.

The fact that the market rallied on the Fannie Mae (FNM, $0.99, up $0.26) and Freddie Mac (FRE, $0.88, unchanged) bailout was our rally but it doesn’t set a good example. Without getting long in the tooth, who’s next? Will it be Lehman? Or will it be Ford Motor (F, $4.40, down $0.15) or General Motors (GM, $10.76, down $0.07)? I could care less about Lehman but why not grab the bull by the horns and give Ford and GM the incentive or cash to bring hybrid cars to the market quicker? The point is “the market can remain irrational longer than you can remain rational.”

Keep this in mind and don’t get too comfortable with any trades. The market could be setting up for an explosion to the upside or an implosion to the downside. Don’t forget we are historically in a lousy couple of months for the market (September and October) and something has to give. The VIX (VIX, 25.47, up 2.83) is heading towards 30 which could be when the bulls make their stand (or their last stand). I’ll talk more about the VIX over the next few days.

Rick Rouse
Rick@OptionsMentoring.com

As we head to lunch, here’s some tidbits on some of the stocks we are currently following.

On September 2, I did a piece on McDonald’s (MCD, $63.88, up $1.46) saying the company would be reporting great same-store sales. At the time, the stock had lost its hype because the Olympics had finished and Wall Street grew bored with the stock. It was a great time to go long some calls options and that we did. Although these calls doubled shortly after I mentioned them, then traded lower, today is another payday. Same-store sales rose 8% in August.

The September 65 calls (MCDIM, $0.65, up $0.30) are up 86% this morning and could have been bought for 40 cents on 9/2. The October 65 calls (MCDJM, $1.65, up $0.45) are up 38% and were going for $1.25. This is the second time the market is begging you to take profits so manage your positions accordingly.

Research in Motion (RIMM, $104.27, up $1.60) has rebounded nicely and has traded as high as $106 today. Apple (AAPL, $158.40, up $0.48) is introducing new and cheaper iPods in a couple of hours.

Lehman Brothers (LEH, $10.18, down $3.97) hit a low of $8 earlier in the session after buyout talks with the Korea Development Bank have ended. I’ve been hesitant to make an option trade on Lehman but a strangle is looking more and more like a possibility. If you want to pull the trigger on one here is the play. The October 12.50 calls (LYHJV, $2.41, down $1.44) and the October 7.50 puts (LYHVU, $2.34, up $1.55) look like the perfect fit. As sure as the sun will come up tomorrow, you can almost bet Lehman is going to move $5 in either direction by October, if not within the next day or two.

The DryShips (DRYS, $53.30, down $4.12) October 60 puts (DQRVL, $9.70, up $3.20) continue to soar. If you recall, we did a strangle trade on DryShips on August 25. We sold the calls shortly after the trade and the puts were trading for $2.60 at the time. They have more than tripled and are working on a “quad”. As you can see, some of the strangle trades we have been using are providing us with monster returns.

Rick Rouse
Rick@OptionsMentoring.com

There has been a slew of takeover offers or ones in the works that I wanted to mention this morning. There may be one or two option trades worth researching but the easy money has already been made. However, it is still nice to see the M&A activity picking up. (All quotes are from Friday’s close)

SanDisk (SNDK, $17.64, up $4.18) had a huge day Friday on news that Samsung Electronics is considering an offer for the company. The Korean semiconductor giant already supplies flash memory chips to SanDisk and figures it is getting a great deal. There were twice as much action in the calls than puts and buyers and sellers of these contracts were targeting the 17.50 and 20 strike prices. The September 17.50 calls (SWQIW) closed at $1.30 while the October 20 calls (SWQJD) closed at $1.00.

UST (UST, $67.55, up $13.55) jumped 25% after Altria Group (MO, $20.95, up $0.29) appears set to acquire the chewing tobacco and wine maker for about $10 billion. More than 31,000 contracts of the September 60 calls (USTIM) were traded as they closed at $3.80. The October 70 calls (USTJN) traded nearly 30,000 contracts and could be a sleeper if we get a higher bid. They closed at 90 cents on Friday.

Lehman Brothers (LEH, $16.20, up $1.03) continues to look for a partner as it seeks to secure a much-needed capital infusion. Although Blackstone Group (BX, $16.43, down $0.31) and Kohlberg Kravis Roberts & Company are said to be looking at parts of Lehman’s business model, I still think Lehman gets and oversees bid. The September 18 calls (LYHIL) closed at $1.05 and could see some action this morning. The October 20 calls (LYHJD) could also be worth a second look and are going for $1.10.

Aside from the M&A activity, don’t forget we still have a “half position” open on Citigroup (C, $19.07, up $0.77) and Wachovia (WB, $16.75, up $1.22). The Citigroup January 20 calls (CAD, $2.10) were profiled at $1.37 and we got 50% on the first half of our position. The Wachovia January 15 calls (WBAC, $4.40) were recommended at $3.00 on 8/20 and half was sold at $3.80 on 8/29.

Citigroup, Lehman and Wachovia should all get a pretty good pop at the open as the Dow looks poised to start the session with at least a triple-digit gain. It would be wise to probably sell the other half of our positions as soon as the market opens. I have a feeling people will be selling into the rally as we go.

Rick Rouse
Rick@OptionsMentoring.com

The market gave back Friday’s gains yesterday as worries about the financial sector heated up once again. The main culprit these days seems to be American International Group (AIG, $18.78, down $1.09) which hit another 52-week low yesterday. This seemed to ignite fears that the deterioration of the credit markets will bring more losses for financial companies. Duh. Wall Street did a good job of keeping that Gennie in the bottle, huh? I wish I had some good news on the sector but if you’ve been reading the blog you know I still don’t trust the financials but I will play some of the bounces.

The Dow Jones fell 241 points, and ended the day at 11,286. The Nasdaq dropped nearly 50 points and finished at 2,365 while the S&P closed 25 points lower at 1,266. Of the 30 stocks that make up the Dow, AIG was the steepest decliner. A cut on the stock’s price target and the fact that the company may also have its credit rating slashed weighed heavy on AIG. The shares are at their lowest levels in 13 years. AIG accounts for 1.34% of the Dow’s 30 weighted stocks and ranks 28th on how much it accounts for the change in the Dow. By contrast, IBM makes up 8.79% of the index and is 1st.

I have been timid to profile a put trade on AIG because I’ve was expecting a bounce like some of the other financial stocks. However, when the stock touched a low of $19.73 on July 15, we should’ve known that it would be back in the teens before too long. AIG is in real trouble and I wouldn’t rule out a dip below $15 in the near future. The September 18 puts (AIGUS) closed at $1.32 yesterday.

Lehman Brothers Holdings (LEH, $13.45, down $0.96) was one of those “bounces” I played in the sector and we were in and out of a Lehman trade in two days for a 70% gain. Monday’s drop puts the stock back to where our original entry point was. The stock surged Friday following reports that a bid was forthcoming but that quickly got shot down like a skeet target after South Korea’s financial regulator said that it might not be a good idea if the Korean Development Bank made a bid.

What was weird was the enthusiasm in Freddie Mac (FRE, $3.29, up $0.48) after another debt offering. Freddie rose 17% after issuing $2 billion worth of debt. Wow. I can’t believe I just typed that. On a day the Dow was down nearly 250 points, both Freddie and Fannie Mae (FNM, $5.19, up $0.19) were up. Throw in the fact that the Existing Home Sales report painted another bad picture for the housing market makes it a miracle that these stocks managed to trade higher. Normally when a company issues $2 billion in debt the stock goes the other way. Now can you see why the financial stocks can’t be trusted?

Of course, I happen to love the volatility because it provides you the opportunity to make money in up and down markets. Hence our OptionMentoring.com slogan. As far as the current market, we could be setting up for a pretty negative week unless some “good news” miracle happens. There are a lot of economic reports due out this week and Wall Street is looking towards next Monday’s day off as the summer vacations start to wind down. I am expecting light volume and a downtrend at least through the holiday.

Rick Rouse
Rick@OptionsMentoring.com

Lehman Brothers (LEH, $15.82, up $2.10) is trading higher this morning on news that the Korea Development Bank was considering a bid for the company although nothing is official. According to the story, the Korean bank didn’t reach an agreement with Lehman because it is still worried about the company’s debt. Lehman’s stock has been punished as it struggles to raise capital due to the subprime exposure mess on its books.

There’s also chatter that Lehman discussed the sale of a 50% stake with KDB or China’s CITIC Securities on Thursday, but those talks are said to have failed because both companies felt the asking price was too high. Wall Street is also saying that Lehman’s is trying to find a buyer for some of the bank’s business and was looking for a $20 per share acquisition price.

I don’t know if that’s going to happen but the pressure cooker is on. Either way, we have already been rewarded with one of our call option plays. Lehman opened up this morning at $15.80 and I’m not sure if we will go much higher than that today. Usually these types of events give a stock a big pop in the morning and it slowly drifts lower the remainder of the day.

The January 20 calls (LYHAD, $2.40, up $0.40) opened this morning at $2.40 which is well over our exit target of $2.00. The calls were profiled at $1.40 and a $2.00 stop would have given us a 40% profit. We are now looking at a 70% profit and it would be wise to close the position or at least half of it. I’ll provide an update later in the day on our other positions.

Rick Rouse
Rick@OptionsMentoring.com

The “timing is everything” quote couldn’t have had more meaning today with a few of our trades. The bears had thoughts on taking the financial sector lower until the bulls stepped in and took over. The earlier blog this morning couldn’t have come at a better time although it’s a little too early to tell if the trades will pay off big.

To start, there were a few trades I mentioned this morning involving Citigroup (C, $17.49, up $0.30), Lehman Brothers (LEH, $13.73, up $0.66) and Wachovia (WB, $14.90, up $0.60). All three stocks had a volatile session and were all over the map providing traders with plenty of good entry points.

The Citigroup January 20 calls (CAD, $1.52, up $0.03) traded as low as $1.30 and were a nickle off from our target entry price of $1.25. Some of you may have pulled the trigger at $1.30 which was close enough and are now looking at a 15% gain. You could set stops at your entry price if the volatility is too much for you to bear.

Trading Lehman Brothers could be like catching a falling knife, eventually, because the “bankruptcy” rumors are flying around this company like pigeons on a boardwalk. Lehman could be in serious trouble unless it sells some of its assets which is being considered. I said the January 20 calls (LYHAD, $1.80, up $0.25) were “mouth-watering” at $1.40 and low and behold, they were. The calls made a nice 30% gain by the end of the day. We are targeting the $2.00 level as an exit for a quick 40% profit and a stop of $1.60 gets you a 15% return.

Wachovia shares rebounded 6% from the morning blog after news broke that a private real estate company had bought some of the bank’s troubled land and construction loans. The January 15 calls (WBAC, $3.50, up $0.20) were trading for $3.00 and ended the day 17% higher than our entry price. The stock really got some legs after the news and was looking at busting through $15 before the final bell sounded. If the stock can back to the $17-$18 range over the next week or so, we could be looking at 50%+ returns.

And finally, there’s Yahoo (YHOO, $19.17, down $0.25) which continued lower throughout the rest of the day. The October 20 calls (YHQJD, $1.30, down $0.20) and the January 22.50 calls (YHQAX, $1.35, down $0.10) provided us good entry points today because…after the closing bell Yahoo announced an Internet-TV deal with Intel (INTC, $23.39, down $0.20) that will provide users a new and unique way of using the Internet.

The Widget Channel could be Yahoo’s wild card that saves the company’s stock. Intel’s chip, called Intel Media Processor 3100, will start appearing in televisions, set-top boxes and other television-connected gizmos as early as next year. Yahoo will then bring the Internet to TV by using bite-sized snippets, or widgets, rather than the whole Internet.

The technology sounds exciting although the news did not do much for Yahoo’s stock in after-hours trading. The shares are up only two cents but Yahoo should open higher on Thursday after the talking heads pump up the news.

Rick Rouse
Rick@OptionsMentoring.com