Stephen Frankola sends: Normal people would be asleep at this hour, but I was finishing up an assignment, when I got an email news alert about an oil pipeline explosion in the USA. Crude future bounced up $3 immediately after declining significantly over the past two days, and regular trading on the NYMEX tomorrow, once all details are out, could have an even more severe result.

Right now I still own some Marathon Oil (MRO) shares, but no longer have any options positions in Conoco (COP). I was actually thinking about buying both calls and puts as a play on volatility, but the money hadn’t transferred into the account as of yesterday, and I’m sure oil companies are going to move a couple percent in either direction tomorrow based on this news.

If things ARE flat, I was going to buy Conoco 80 calls and 75 puts (stock is around 77). With inventory news and a big OPEC meeting coming up, I think it’s going to be a volitile couple weeks for oil. (Plus, it’s forecasted that the eastern US is going to get its first taste of winter, which may boost the price of heating oil and natural gas).

By the way, not to toot my own horn, but even without a significant drop in the price of oil, the major oil companies have pulled back around the levels seen during the previous price correction. Conoco fell from almost 90 to 75; Chevron and Exxon have not declined quite as significantly, but they have corrected. If oil goes down to $75/barrel… I don’t know what’s going to happen to the stock price. Expensive oil isn’t always great for the big oil companies, but sometimes they trade as if it is.

Second thought:

Right now I own Electronic Arts (ERTS) stock in one portfolio and some Activision (ATVI) options in my smaller, riskier portfolio. I actually purchased the ATVI options before their earnings release, after which the stock dropped from around $23 to as low as 19. However, they revised their numbers upward (after guiding low in the conference call - go figure) due to strong sales of Guitar Hero 3. I own the December $25 calls, so the stock still has to move about 10% to be ATM, but with two hot games (Guitar Hero 3 and Medal of Honor: Modern Warfare) I think it’s going to be a fantastic holiday season for Activision.

Electronic Arts is the 800-pound gorilla of video games, but they don’t have a clear-cut winner this holiday season. They did release Rock Band, a competitor to Guitar Hero, but its success cannot be predicted. However, I think that this Christmas season is going to be better than expected, so I plan to ride what I expect to be a wave of good news and higher share prices through the holiday season.

So in conclusion:

-Watch the price of oil and oil stocks
-Activation will be GREAT this holiday season; Electronic Arts (ERTS), Take-Two (TTWO) might tag along for the ride. If Rock Band is a hit, EA could have a very nice pop, while ATVI would suffer.

Oil is now up almost $5/barrel. Once again, this is “after-hours” trading, not even the usual floor trading on NYMEX. The pipeline system that exploded carries 1.5 million barrels per day into the US; that’s very significant. It’s hard to tell how extreme of a reaction is going to occur, but I can’t see it having a positive effect on the overall stock market. After two huge-gaining days, I think that this news may halt the rally very quickly.

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