1. Commentary
2. Oil and Gold
3. Options Education
4. Credit Spreads
5. Current Trades
6. Earnings
7. Closing Thoughts

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1. Commentary

The market was under tremendous pressure last week and as the saying goes, pressure bursts pipes. Wall Street took a back seat to Washington as the stimulus package and details on the financial relief plan were all that mattered to traders.

The market’s downturn started as soon as Treasury Secretary Geithner spoke on Tuesday and carried into Wednesday as the Dow hit a low of 7,835. The much-anticipated Geithner speech was originally scheduled for Monday but got delayed a day as Congress was hammering out the final details of the stimulus package. Maybe the delay was a good thing because downside momentum picked up and by Thursday the Dow was at 7,660. If it wasn’t for a late day short-covering rally, it could have been much worse.

It was another week of uncertainty and that is one thing the market hates. With little details or clues on a nearly $800 billion stimulus package, the market had little direction and lacked enthusiasm. As a result, the Dow lost 420 points, or 5.2% to end the week at 7,850. The S&P 500 fell 42 points, or 4.8%, to settle at 826 while the Nasdaq gave up 57 to finish at 1,534, a loss of 3.6%.

This brings all three indexes at a loss for the year with the Dow off by 10.6% and the S&P 500 by 8.5%. The Nasdaq was in the black last week but is now down 2.7% YTD. The November lows appear like a sure bet to be tested and I’ll talk more about that later on.

The market was closed Monday for Presidents Day and on Tuesday the President is set to sign the stimulus bill in Denver. We will have to watch the futures on Tuesday morning to get a feel for the market’s movement but trading next week will again be volatile either way. On Wednesday, Obama is also expected to outline his mortgage-rescue proposal. And on Friday, we have the expiration of the February options cycle.

Should be another interesting week…

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2. Oil and Gold

Although U.S. markets were closed on Monday, oil and gold still traded.

Oil prices stayed above $37 a barrel after OPEC stated over the weekend that more production cuts are possible as they adjust to weakening global demand for crude. Oil had a big day on Friday, rising $3.53, to settle at $37.51. The problem here is that OPEC wants to cut production to get prices back to $70 because many countries have budgets that depend on oil and they want the price higher.

By cutting production, demand will increase and the price of oil heads higher. The problem with that is that inventories are already rising as demand continues to slow amid the global economic downturn. The sentiment among the oil buffs is that crude prices are unlikely to rise above $40 per barrel, even if OPEC decides to cut as much as 2 million barrels per day next month. Either way, I don’t think we are going to see $70 anytime soon and would bet on the low $30′s before $70.

Gold was down slightly and is fetching about $942/ ounce. There are a lot of different ways to look at gold as far as charts go and by that I mean investors use indexes, ETF’s, or even stocks. The bottom line is that most of the charts everyone is analyzing is showing bullish patterns and the market is bullish. It almost seems a sure bet gold will break $1,000 but this is when I get a little cautious. We’ve been down this road before and if you’ll recall, we had the gold bulls telling us gold was headed to $1,500. That was a year ago and it still hasn’t happened.

I’m not saying it won’t or gold can’t continue its rally but $960 will be a key level of resistance. You could make an argument that gold is rising because of the bailout programs now going on around the world and that argument is valid. The more ‘liquid’ countries make their money it puts more pressure in finding a trustworthy commodity. Gold happens to be that commodity and this could be the key on where gold is headed.

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3. Options Education

If you are new to options trading then getting started can be an overwhelming task. Yes, there is a lot of terminology that comes with trading options and there are numerous ways to get started. What you don’t want to do is get caught in a trap for paying too much for your education. There are websites out there that charge a ton of money that claim to teach you options trading but are you really getting your money’s worth?

I hear stories of what people pay for an options education and I’m amazed at some of the prices that people are paying for option courses. People are paying $7,000 for some of the “trading software” that these option courses say you must have. I have heard investors who have spent $25,000 for an options education and they still don’t know what they heck they are doing. This is crazy.

Everybody has their way of doing business but I really believe if you are new to options trading, the best advice I can give you is to have a mentor. There are many strategies you can incorporate in your options trading account but you have to understand what they and do and not be afraid to learn them.

A lot of people are telling me their 401K plans are down 30% and 40%. My first question is why? They say “I don’t know”…

Look, what we teach here at OptionsMentoring.com are tools that you can use to protect your accounts from getting hammered while generating cash flow. We don’t upsell you on software, we teach you to use the tools that come with most brokerage accounts. It’s that simple. Other firms get you to believe that you “need” their software to “filter” trades or to “screen” option trades. If you have an account at Schwab, E*Trade, OptionsXpress, ThinkorSwim or elsewhere, you can use the tools that come with your brokerage account.

What we teach you is how to manage a trade, make adjustments, entry and exit points, and show you in real time how things work. We can teach you how to use credit spreads to generate extra cash flow for your trading account, retirement account and even your 401K.

We also offer real-time classroom training three times a week where you can interact with an instructor. You also have the ability to speak with someone live that will work with you one-on-one. In other words, a mentor.

I bring this up because I get a lot of requests on where to start and what to look for in the stock market. The key is getting started and learning to take charge of your investments without believing you need a “guru” to manage your account. You have to start somewhere and there is a lot of misleading information out there.

If you are serious about options trading my best advice is to give us a try. I’m not saying that as a sales pitch but because I really think we offer a program for a good value and one that can make you money.

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4. Credit Spreads

Now that I have peaked your interest in option credit spreads, I’ll explain how they work.

Credit spreads can be used to generate income in your portfolio. When you sell an option and buy a lower strike priced option, you generate a net credit to your trading account. Credit spreads can be bullish (you think a stock is going up or bull call spreads) or bearish (you think a stock is going down or bear call spreads) or neutral. We specialize in the neutral strategies.

This strategy allows you to achieve both steady income with controlled risks. This is accomplished by selling and buying call or put options depending on your assumption of where a stock is headed or if you believe it will stay flat. You collect a premium up front and all you have to do is wait until the expiration date, when hopefully the positions expire worthless. The beauty of a credit spread is that the “time decay” is on your side, not working against you.

Without making this too technical, a credit spread involves both the purchase and sale of put options or call options that expire at the same time but have different strike prices. You would use put and call options if you are bullish or bearish on a stock, index, and or ETF (exchange traded fund).

Credit spreads that are out-of-the-money allow you to collect the premium on the option that is closer to the security you are following and pay for an option that is a little further out. This results in a net credit which is the money you keep in your account and the goal is to have both options expire worthless.

However, the one thing we teach you that many other option courses that are priced a lot higher than ours don’t is how to adjust your trades. By having a mentor, you will learn the probability of the trade, how to set alerts and adjust your trades. These are the three simple most important aspects of the trade and without knowing this, you could be headed for serious trouble.

The feedback we get from students that have tried other option trading courses is that the mentoring part of our program is the single most important attribute of our course. I’ll be blunt with you. The current market is one that is presenting the opportunity of a lifetime despite the fear that we are headed lower. Even if you are bullish, stocks are cheap from a historic standpoint and the volatility shouldn’t scare you either. It’s time, if you are really serious about option trading, to take the leap from textbook to real world trading. We make the learning curve that much faster and easier because we mentor you. Having a mentor to look over your shoulder is priceless.

Education is the most important tool you can ever have to build your retirement account. Don’t you think it’s time to start learning options and take control of your accounts? There were a slew of people that cashed in their retirement accounts in 2008 because they were so scared it was going to keep going lower and they pulled out of the market altogether. Instead of panicking, learn to make money in all kinds of markets. That is what we are here for.

Our Chief Market Strategist is Mike Albright and he can be reached at 1.877.709.8716. I encourage you to call him if you are seriously looking for ways to generate income in your portfolios.

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5. Current Trades (from the Weekly Wrap and Blog.OptionsMentoring.com)

Akamai Technologies (AKAM, $17.72, down $0.12)

Akamai managed to test $18+ a few times last week and the March 17.50 calls (UMUCW, $1.45, down $0.05) were entered at $1.25 on 2/9. The calls traded as high as $1.75 and are showing a profit. We are set for a rocky week and the call options could struggle if the market heads lower. Stops should be set at $1.25. If we are stopped out, maybe we will re-enter the trade at a later date and cheaper price. If the stock manages to start the week off in positive territory, we will manage our position from there.

Bank of America (BAC, $5.57, down $0.30)

The March 6 calls (BYOCF, $0.90, down $0.25) and the March 7 calls (BYOCG, $0.60, down $0.20) were entered at 90 cents and 60 cents, respectively, on 2/12. They are right at our entry prices after the stock’s 5% slide on Friday. There are no stops on these call options but conservative traders may want to set 50% loss limits. There will be more action in this stock this week than Chris Brown at the Grammy’s. Trust me. The February options expire this Friday and there will be a battle on where the stock settles on expiration day. Our options have another four weeks until expiration but they will be volatile as well.

Genentech (DNA, $83.25, down $0.75)

The February 95 calls (DWNBS, $0.05, unchanged) are in front of the firing squad this week. This trade was a total disaster as the call options we profiled at 85 cents. We could have gotten out at 40 cents but I kept the position open because the March 95 calls (DWNCS, $0.40, unchanged) are backup. The March calls were up 10 cents for the week but haven’t been much of a wingman at this point.

Spider Gold Shares (GLD, $92.55, down $0.62)

The ETF had a terrible start to the week and hit a low of $87.60 on Monday before bouncing back with multiple up days. The March 99 calls (GLDCU, $2.05, down $0.40) and the March 100 calls (GLDCV, $1.80, down $0.40) were entered at $2.05 and $1.90. Both positions were up over 20% before Friday’s letdown. Stops are set at half our entry levels.

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6. Earnings

Tuesday: Chesapeake Energy (CHK, $18.60, up $0.17), Fossil (FOSL, $12.09, up $0.74), FreightCar America (RAIL, $18.71, down $0.65), Jack in the Box (JACK, $23.03, down $0.24), La-Z-Boy (LZB, $0.95, up $0.12), Medtronic (MDT, $32.81, up $0.01), Rick’s Cabaret (RICK, $3.93, up $0.04), Transocean (RIG, $60.15, down $0.04) and Wal-Mart Stores (WMT, $46.53, down $1.60).

Wednesday: Advance Auto Parts (AAP, $32.82, down $0.18), Baidu (BIDU, $128,20, down $3.80), Blue Nile (NILE, $22.92, down $0.08), Deere & Company (DE, $36.11, down $1.19), Denny’s (DENN, $2.16, up $0.01), Hewlett-Packard (HPQ, $35.87, up $0.63), OfficeMax (OMX, $4.49, down $0.31), Owens Corning (OC, $13.41, up $0.04), Playboy Enterprises (PLA, $1.67, down $0.03), Priceline.com (PCLN, $72.66, up $0.45) and Whole Foods Market (WFMI, $9.97, down $0.32).

Thursday: Expedia (EXPE, $9.17, up $0.07), Goldcorp (GG, $31.75, down $0.10), Intuit (INTU, $22.97, down $0.28), Newmont Mining (NEM, $41.58, down $1.17), Noble Energy (NBL, $54.02, up $0.54), Reliance Steel (RS, $24.26, down $0.06), Sprint Nextel (S, $2.82, up $0.32) and Toro (TTC, $27.44, down $0.90).

Friday: Barrick Gold (ABX, $37.94, down $1.04), JCPenney (JCP, $15.77, down $0.04) and Lowe’s (LOW, $17.80, down $0.73).

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7. Closing Thoughts

Last week took the wind out of the bulls’ sail as the Dow broke below the 7,800 support level. The November low is 7,400 and if that level is broken there is no immediate support which could trigger an even bigger decline. The flip side of that coin is that the stimulus packages work quicker than anyone could ever imagine and the world goes back to spending like there is no tomorrow.

This week will be the expiration of the February option chains and that will add a little extra spice to trading. Plus, we get some heavyweight earnings. Wal-Mart and Chesapeake Energy start us off on Tuesday. Wal-Mart could miss it earnings number and many analysts are now expecting something like 94 cents a share instead of the 99 cents Wall Street had figured. That would be a far cry from the $1.03 and $1.07 range Wal-Mart gave last month.

Wal-Mart is on the brink of setting fresh 52-week lows as the stock fell another 3% on Friday. If $46.25 is broken, Wal-Mart could skid as low as $42-$43. There was huge volume in the February 45 puts (WMTNI, $0.51, up $0.28) as over 7,000 contracts traded. I wouldn’t engage in these particular options but if the March 42.50 puts (WMTOV, $0.85, up $0.20) are still under a buck when trading resumes on Tuesday, they have a good chance of doubling if Wall Street punishes the stock.

Wednesday we get Federal Reserve Chairman Ben Bernanke and it is almost a given the market heads lower whenever he talks. I’m not sure what the stats are but every time I tune in to listen to him, the market heads south. We also get a report on housing starts for January.

The market will be walking on eggshells Thursday as the Labor Department will release weekly jobless claims figures. Throw in the fact that General Motors (GM, $2.50, down $0.15) and Chrysler are front and center for showing how they can repay billions in loans, options expiration on Friday, and you can see why the market is likely to be jittery.

Be sure to check the blog for updates…

Rick Rouse
Rick@OptionsMentoring.com