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Updated from 1:10 p.m. EST

Crude oil futures dropped sharply in electronic trading Tuesday after finishing the normal session slightly higher at the New York Mercantile Exchange.

In an extremely volatile trading day, crude futures fell early, rebounded around midsession, and then plunged after normal trading ended.

At 4 p.m. EST, the March contract for light, sweet crude oil was down 92 cents to under $61 a barrel after closing the floor session at $61.46. Heating oil climbed 2 cents to close at $1.78 a gallon, and gasoline ended the Nymex session up 3 cents at $1.81 a gallon.

Natural gas finished 2 cents lower at $7.53 per million British thermal units.

An overnight collapse in Chinese equities swept through global markets early on. The Shanghai Composite Index fell by 8.8% amid rumors that the Chinese government was preparing to put the screws to an overheating economy. Macroeconomic concerns reverberated around the world, and in the U.S. the Dow Jones Industrial Average was down more than 400 points.

“Equity prices in China have tripled in the last 18 months. Meanwhile, China has increased its benchmark lending rate multiple times. … [A] fter the lunar new year, this confluence of factors is weighing on investors’ expectations of the future,” said Dennis Gartman, publisher of The Gartman Letter, an economic report.

Energy prices were snagged early on by the global bear run. However, they later reversed direction and moved upward as investors began to anticipate that the Energy Information Administration will release bullish crude oil inventory figures on Wednesday, according to Ed Meir, an energy analyst at Man Financial.

Following normal trading, crude futures changed direction again.

Hawkish comments from Iranian President Mahmoud Ahmadinejad over the weekend concerning his country’s nuclear ambitions propelled crude oil to its highest close of the year on Monday.

News agencies reported that Ahmadinejad was criticized at home for lacking diplomatic sophistication. The reaction against his comments also dragged down crude oil prices. Some traders are re-evaluating the likelihood that elevated tensions between Iran and the West will spark a crude oil supply shock.

Oil prices have risen by roughly 20% since the end of 2006. Worries over Iran’s nuclear ambitions have been a key catalyst for the jump in prices. However, many analysts say that the U.S. and other Western countries ultimately aren’t willing to risk the consequences that a cut in Iranian oil supplies would bring.

Meanwhile, U.S. energy equities were weak. BP (BP) closed down 3.2% to $61.87. Chevron (CVX) fell 4% to $68.58, and Exxon Mobil (XOM) slid 4.7% to $71.83. Electricity utility Exelon (EXC) reduced power output at its Peach Bottom Atomic Power Station in Pennsylvania after it reported a small fire in an electrical transformer cabinet. Exelon’s stock was down 4.7% to $66.47.

Oil and gas drilling firm Patterson-UTI Energy (PTEN) was downgraded by Credit Suisse from neutral to underperform and its price target was reduced from $31 to $22. Shares were 4.8% lower at $22.87.

Elsewhere, Teekay Offshore (TOO) and Teekay LNG Partners (TGP) dropped after being downgraded by AG Edwards from buy to hold. Both are units of Teekay Shipping (TK) .

U.S. Treasury debt prices fell on Friday, pushing yields to two-week highs, after strong jobs data dashed some of the remaining expectations that the Federal Reserve would cut interest rates this year.

Unexpectedly robust job growth in June and upward revisions to figures for April and May added to recent downward pressure on bonds. Based on the rise in benchmark yields, the market was on track for its biggest week of losses in just over a year.

The employment report was the latest in a series of data releases to indicate the economy rebounded strongly in the second quarter after a dismal start to the year, suggesting there was no need for a growth-boosting interest rate cut.

Prices on benchmark 10-year notes fell 10/32, pushing yields up to 5.19% from 5.14% late on Thursday. Benchmark yields reached a peak of 5.21 %, their highest since June 22.

Two-year Treasury notes slid 1/32 for a yield of 5.00%. Two-year yields briefly rose to 5.02%, their highest since June 19.

Two-year notes were on pace for their biggest weekly rise in yields since April this year.

Five-year notes dropped 6/32, lifting yields to 5.10% from 5.05%. The 30-year long bond slid 21/32, pushing yields up to 5.27% from 5.23%.

The jobs report, one of the biggest monthly releases on the data calendar, added fuel to global bond market fears of a prolonged fight by the world’s central banks to keep inflation under control.

Euro zone and British debt prices also fell on the news.

In the United States, investors have eliminated most of the last remaining bets on the Fed cutting benchmark rates from their current 5.25%, where they have been for a year.

In addition to the jobs figures, surveys this week showing that manufacturing and service sector growth hit their fastest pace in over a year last month helped to flesh out a robust picture of the U.S. economy.

“The bond market has backed up on the growth data and we expect that to continue throughout the year,” said Michael Pond, Treasury and inflation-linked strategist at Barclays Capital in New York.

“We expect the bond market will factor in rate hikes in the coming months but it will take time to get there,” he added.

Change in Ratings

Credit Suisse said it is upgrading Barrick Gold (ABX) to Neutral from Underperform based on higher gold assumptions. Raised target price to $34 from $30.

Bed Bath & Beyond (BBBY) BBBY downgraded to Neutral rating from Buy at UBS. Price target and 2007 EPS estimates hold at $46 and $2.20, respectively.

Goldman said it is upgrading Brocade (BRCD) to Buy from Neutral based on improved visibility in the wake of McData acquisition and signs that company’s expansion beyond core fibre-channel switch business will be next revenue growth driver. 2007 estimates raised 6 cents to $0.49 and price target increased to $11 from $9.25.

Brocade was upgraded from Peer Perform to Outperform, Bear Stearns said. $12 price target. Estimates also raised, after the company posted strong first-quarter results.

CompuCredit (CCRT) was downgraded from Market Perform to Underperform, Wachovia said. Estimates also cut, to reflect higher fee-based charge-offs. Earnings quality is also declining.

Ceridian (CEN) was downgraded from Market Perform to Underperform, Raymond James said. Stock is trading at the high end of its valuation range, on a sum-of-the-parts basis. Prefer ADP at current levels.

Ceradyne (CRDN) was downgraded from Outperform to Market Perform, Wachovia said. Stock is up 28% since September, and margins may well peak in 2007.

Credit Suisse said it is upgrading Citrix Systems (CTXS) to Outperform from Neutral based on improved ASP trends. Raised target price to $41 from $35.

Credit Suisse said it is upgrading Freeport-McMoRan (FCX) to Outperform from Neutral based on higher copper prices in near-term and valuation. Raised target price to $70 from $50.

General Electric (GE) was upgraded to buy from neutral at UBS. Price target lifts to $45 from $40 and 2007 EPS estimates hold at $2.20.

Methanex (MEOH) was upgraded to Neutral rating from Reduce at UBS. Price target bumps to $26.50 from $26 and 2007 EPS estimate holds at $3.51.

NYSE Group (NYX) was downgraded from Neutral to Underweight, JP Morgan said. Float will increase materially in the next month, as recent listed volume has been softer than expected.

Credit Suisse said it is downgrading Patterson-UTI Energy (PTEN) to Underperform from Neutral based on reduced earnings power from share losses and industry capacity additions. Lowered target price to $22 from $31.

Morgan Stanley upgrades R.H. Donnelley (RHD) from equalweight to overweight, and removes its $61 price target.

Stock Comments/EPS Changes

Gulfmark Offshore (GMRK) numbers raised at Jefferies. Price target lifts to $46 from $41 and 2007 EPS estimates rise to $4.22 from $3.98. Reiterates Buy rating.

Goldman said it is upping its 2007 estimates on Merck (MRK) to $2.61 from $2.58 , based on higher expectations for Januvia earnings in wake of less competition this year. Price target increased to $43 from $39 but maintained Sell rating.

Goldman said it is reducing its 2007 estimates on SanDisk (SNDK) to $0.95 from $1.30 after company analyst meeting. See weak near-term fundamentals, including 55% declines in ASPs this year. Key issue is continuing oversupply. Gross margins guided lower to 12%-23% and operating margins guided down to -8% to 4%. Maintained buy rating and $46 target.

Target on XM Satellite (XMSR) cut to $14 from $15.30, Goldman said. Company guidance for 2007 came in weak regarding subs, revenue and profitability. XM now targets 9 million to 9.2 million subs in 2007. Maintained Neutral rating.

For a few investors it was looking a bit like an investment-style “mayday” in U.S. markets this morning. But by the second half of trade, many stocks had rebounded from two sessions of aggressively lower prices. Some of the profit-taking was related to earnings, while in other instances, an easy-to-reach money management conclusion for April’s solid percentage performance into multi-year territories likely played a key role.

One stock, which saw a bit of both those issues affecting its share price in Tuesday’s action was Archer Daniels Midland (). The company reported worse-than-expected earnings of 51 cents a share versus forecasts of 66 cents per Reuters. The earnings figure did come in above last year’s results by three cents. However, most traders wouldn’t call today’s report a growth stock situation. Compounding matters for investors, management didn’t guide estimates higher and investment house Prudential cut its 2007 profit estimate by seven-cents to $2.40 a share.

With plenty of fundamental caveats in place, what if a trader was interested nonetheless in ADM stock? With a Hammer test of its 200-Day exponential average, some Fibonacci, price support and a weekly up channel still intact, maybe a directional long does hold some promise for a few strategists out there, despite the stock’s closing decliner of 2.10 to 36.60. But, is there a better way to position in ADM on the heels of today’s aftermath, versus an outright position in the stock? In the following two-part series, I’d like to illustrate a comparison between two simple strategies so traders can gain a better understanding of each on a risk-to-reward basis and hopefully make stronger option-based positions down the road.

One of the nice prospects about directional trades post earnings are that contra gap risk is typically reduced and the prices paid for an optionable strategy are typically cheaper. This happens to be the case as of the close of trading in the ADM Calls. As such, the first position type that I wanted to illustrate is the very simple buying of Calls in lieu of stock. The more difficult to understand or appreciate part, sometimes, is which Call to buy.

Looking at the options board, my focus was on the May and June maturities. The reason being is the technical confirmation presented in this article doesn’t necessarily relate to the next series after that, namely September. Those options, with 143 days to expiration make the premiums too expensive to consider for this outlined risk-to-reward proposition. Further, with ADM offering no 37.50 Strike, but the stock at 36.54, the choice is narrowed further to either the 35’s or the 40’s. One could go deeper with the 30’s in order to establish a near match to the underlying delta, but the 20% plus premium paid versus the characteristics of the 35 level, don’t make for nearly as of a compelling choice.

Moving a step further, the observation is that of the two remaining strikes, the 35’s offer the best value as the 70-plus delta in both months and gamma factor will afford quick appreciation that’s not too far removed from the pure stock play. Further, as an option that’s only 4% in the money, should a contra gap occur, this series will retain value as the delta drops more rapidly and perhaps, volatility (which dropped between 4 and 10 points in IV to mid to high 20’s %) might actually rise ‘blip’ up to levels above fair value, with current prices slightly below based on different IV vs SV relationships.

Finally, in weighing the choice between May and June, the observation is that the June 35 Calls are the favored option in this situation. Not by much, but enough to consider them advantageous. Shown above is the June 35 Call using 3 contracts near the end of trade. While in outright dollar terms this purchase would amount to an extra 45 debit (2.35 versus 1.90), with forty-five days left until expiration versus seventeen, that price paid is really not a concern unless we have a severe contra gap and even then, it would only amount to that exit little bit paid.

However, if we use a 3.5% stop loss, which is about 30 cents below Tuesday’s Hammer lows and the basis for our technical appreciation, the loss incurred on the June Calls would be nearly identical to that lost on the May purchase assuming an equal contract amount. That also assumes that if the Hammer fails to hold, that the technical break occurs in the next week. This market observer sees that as being a fair condition.

Meanwhile, should more benevolent conditions appear in the green corn fed skies that bullish dreams are made of, the extra time, is likely to be, well spent. The June Calls aren’t a pure advantage in its delta count i.e. slightly less in gains on the upside, but the time left to expiration is much more in line with the existing weekly up channel. It then stands to reason that realistically, to profit from any moves that might occur, the trader would be better positioned with the June crop as the conditions for growing Calls are still a bit icy yet.

Visit the http://www.investors.com/FinancialDictionary/List.asp?type=s&key=11 for an extensive list of option-related terms.

The observations provided are not investment advice or a recommendation, the suitability of which is considered the responsibility of the trader.

Copyright 2007 through Optionetics, Inc. All rights reserved. http://www.optionetics.com?source=ibdweb is a Trademark or a registered Trademark of Optionetics, Inc., in the United States and/or in other countries.

Until very recently, traders focused on the energy complex had few options, so to speak. It was either the Select Sector Energy ETF () or the Oil Services HOLDRs (). And while there’s nothing wrong with them, options strategists now have the opportunity to look at trading a pure play on the space. With regulatory red tape recently cleared, the United States Oil Fund LP () now has listed Calls and Puts available for trading.

Along with eleven other commodity-based ETFs, the Chicago Board Options Exchange (CBOE) began listing options on the USO. The instrument is an exchange-traded fund that looks to mirror the performance of the spot market for West Texas Intermediate Light crude. Trading of the options commenced on May 9 with Susquehanna Investment Group (SUSQ) being named the DPM or Designated Primary Market Maker for the product. The USO offers Strikes from 40 through 65 in one-point increments and trade on the January expiration cycle.

A bit more than a month into trading of the contracts and activity has garnered some activity. With the underlying being wildly popular with stock traders wanting a product that moves closely with the ups and downs of crude oil, it’s a small wonder traders are looking at the options to consummate their positioning. Currently, USO liquidity is far from being in the same ballpark of products like the S&P 500 SPDR () or its more established energy brethren. However, it is what most would define as being liquid and certainly offer strategists the opportunity to establish spreads without too much difficulty.

In the several weeks that the options have been trading, stats such as an average daily volume of nearly 1,500 contracts and Open Interest like October’s net of more than 5,300 are a testament of strong interest thus far. Further, most active series have spreads of just 0.10 to 0.15, which should have traders seeing the possibilities of executing some limited risk alternatives versus the stock. Finally, we might anticipate that those all-important characteristics will only improve as word of mouth and perhaps better marketing efforts wake traders like you and I up to this fresh development.

Shown above is what a bullishly positioned Long Butterfly Call spread would look like using Thursday night’s closing prices. The debit of 0.35 per spread, using a two-lot in the illustration, would require a bit of spread shaving, while still giving ‘SUSQ’ the slight edge. And while some investors can’t handle that idea, others might be able to handle that reality much better than what had been the case not so long ago.

Visit the http://www.investors.com/FinancialDictionary/List.asp?type=s&key=11 for an extensive list of option-related terms.

The observations provided are not investment advice or a recommendation, the suitability of which is considered the responsibility of the trader.

Copyright 2007 through Optionetics, Inc. All rights reserved. http://www.optionetics.com?source=ibdweb is a Trademark or a registered Trademark of Optionetics, Inc., in the United States and/or in other countries.