The stock market may have been closed Monday but that doesn’t mean there wasn’t some action in other markets. Hurricane Gustav was expected to have an impact on the market and oil either way but now that it has hit land and has weakened dramatically, it could be a blessing for the market. Especially oil.
Over the weekend, forecasters said Gustav could reach a Category 4 when it hit land but has now been downgraded to a Category 1. Although we aren’t out of the woods yet, it certainly is a relief that we might escape the kind of catastrophic flooding Katrina brought us three years ago.
With Gustav weakening, oil prices fell to $111 a barrel Monday. During Friday’s trading session oil had gained nearly $3 to $118 a barrel in anticipation of Gustav’s hitting the Gulf Coast before settling at $115. This is certainly a good sign for the market but we still must remember that there was some disruption caused by Gustav.
Major oil companies such as Exxon Mobil (XOM, $80.01, down $1.17) and Valero Energy (VLO, $34.76, down $0.26) had already shut down production and evacuated facilities ahead of Gustav but we don’t know how much of this will have an impact on their bottom lines at the moment.
As far as the market itself, we had to adjust our positions as well because of the storm. We made some decent profits on the financial stocks and we closed half of our positions on Friday in each trade. If Gustav would have hit hard, it’s likely the market as a whole would have taken a hit.
When trading options I wanted to bring this point up because sometimes there are the “unknown” factors that could affect our trades. The financial stocks had a great week, especially Fannie Mae (FNM, $6.84, down $1.11) and Freddie Mac (FRE, $4.51, down $0.77), but they continued lower throughout the day Friday after the morning blog. I’m not saying they are done going up but we had to manage risk because of the storm and it forced us out of many positions that may or may not continue to go up.
For the option traders who assume more risk, they will be rewarded if the financials continue higher. But they will also be the ones giving back profits if the financials take a breather this week. The risk is a double-edged sword so to speak…it cuts both ways.
We will have more opportunities to get back into the financial sector but I wanted to show and explain to you how to manage one of the many areas of risk.
Rick Rouse
Rick@OptionsMentoring.com
