HEWLETT-PACKARD (HPQ) PLUNGED OFF A CLIFF THIS MORNING DRIVING OUR STRANGLE UP AN EYE-POPPING ONE-HUNDRED-EIGHTEEN PERCENT!

Once again this past week's action has been interesting--and profitable...

HEWLETT-PACKARD (HPQ) ANNOUNCED EARNINGS YESTERDAY AND THE STOCK PLUNGED OFF A CLIFF THIS MORNING DRIVING OUR STRANGLE UP AN EYE-POPPING ONE-HUNDRED-EIGHTEEN PERCENT!

And those profits include both sides of the play--in other words the total cost, not just the put side. The action on HPQ underscores the beauty of this strategy--most of the time you are 'just' going to make decent returns--like 20 to 30% in a couple of weeks--but once in a while there will truly be an explosion--and that's where we'll make windfall style profits.

The exciting thing is we never know where these profits will come from--or in which direction. HPQ was seen as a bullish trade when we made it--the chart was up, the fundamentals looked good and the stock was rising in anticipation of earnings. And THAT is why trading 'both ways' is so darn necessary--you never know when the CEO is going to cut revenue forecasts by two billion dollars like HPQs Léo Apotheker did yesterday.

We've got several other trades making us money as well--but for now let's take a good look at...

WHICH WAY THIS MARKET IS HEADED

The up escalator seems to have stalled--in fact it it's reversing. One look at the news and you can see why.

Protests in the Middle East are driving oil prices higher and the stock market lower. Al-Jazeera reported today that at least 250 people died in the Libyan capital of Tripoli overnight as violence spread in the nation with Africa's largest oil reserves.

"The dominoes are falling in the Middle East, causing oil to spike and risky asset classes to stumble," Fred Goodwin, a fixed-income strategist at Nomura International in London, wrote in a research note. "Higher oil is a very bad growth shock, as it smashes real incomes."

Crude futures settled today at their highest price since October 2008, briefly trading above $100 a barrel as concerns about civil strife in Libya and anti-government protests elsewhere in the Mideast and North Africa shocked the markets.

Light sweet crude for April delivery, gained $2.68 to finish at $98.10 a barrel on the New York Mercantile Exchange. That was oil’s highest finish since Oct. 1, 2008 -- when oil prices were on their way down from a settlement high past $145 a barrel that summer.

Libyan leader Muammar Qaddafi vowed to fight a growing rebellion until his "last drop of blood"--and he may end up getting exactly that. Qaddafi pledged to deploy the army and police to impose order and called on supporters to "reclaim the streets". Continued protests "will lead to civil war," Qaddafi warned.

The truth is--the country is already split between the East and the West. About two thirds of the population lives in the West, with about one third in the East, separated by about 600 km of mostly empty desert. Two thirds of the oil production is in the East, and about one third of the oil is in the west, so there is this split in the country between the population and between the energy; there’s no overlap between the two. So Qaddafi’s problem is that the majority oil income is dependent upon security in the half of the country that he has no control over.

The unrest in Libya has forced oil companies to shut down production of as much as a million barrels a day of some of the world’s highest quality crude. For the first time, the turmoil that has spread from Tunisia to Egypt to Bahrain has made an appreciable dent on world oil supplies.

Libya produces less than 2 percent of the world’s oil and exports little to the United States. But the high quality of its reserves magnifies its importance, causing a spike in both American and European oil price benchmarks despite assurances from Saudi Arabia that it is ready to pump more oil to calm markets.

Libya’s sweet crude cannot be easily replaced for the production of gasoline, diesel and jet fuel, particularly by the many European and Asian refineries that are not equipped to refine heavier grades of oil. Saudi Arabia may have more than 4 million barrels of spare capacity, but it includes heavier grades of crude that are higher in sulfur content and more expensive to refine--in this case quality counts more than quantity.

Should the turmoil in Libya last for more than a few weeks, oil experts predict that European refiners will be forced to buy sweet crude from Algeria and Nigeria, two principal sources for the United States. That could push gasoline higher in the U.S. where prices have already risen 6 cents a gallon in the last week to an average of $3.19 for regular.

“Nigeria and Algeria are already producing flat out so they can’t come up with another million barrels a day,” Michael Lynch, president of the Strategic Energy and Economic Research consultancy firm, warned. “That means there will be a scramble for lighter crude supplies,” and that could, “force all sweet crude refiners into a bidding war.”

The problem with higher oil prices is they cause higher inflation and lower growth. High oil and gasoline prices take away purchasing power from consumers and high fuel prices make it more expensive to transport goods. If prices stay high in this fragile economic recovery we could see another recessionary dip--and that possibility has the potential of really smacking the stock market--especially at these elevated levels. The question is...

HOW DO WE MAKE MONEY ON IT?

We've got two super high-potential plays today and neither one of them are on stocks. The first is on a double ETF that looks ready to rocket higher--but as always we'll be covered both ways.

Our second play is on an ETF that also looks ready to blast to the upside (in fact it's already started). And the beauty of this one is our entry is cheap--.85 cents or less for BOTH sides making our profit potential 'explosive'!

We've got some huge potential on a market looking 'jiggy'--so let's get to it...

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