“I’m a bit frustrated that I only make about 50% on Jan 08 puts if the NASDAQ falls 10%. I’m comparing that against simply shorting the index, which would net me 10% under the same condition, only with much less risk.”

I also thought about using shorts but am at least ruling that out for myself. Firstly, I don’t think shorting is better/worse compared to puts. I just see it as different ways to skin a cat. Putting the supposed risk of unlimited loss aside since getting squeezed on QQQQ is highly unlikely, I think put options offer what I call execute-then-take-a-vacation benefit because you know the maximum downside. Besides, what I hate the most is I’m right about the ending but was wrong about the process.

The markets are surprisingly strong at this point meaning collectively we assign a low probability to recession in 2007. Besides, the market’s track record for mid-election year bounces is just too good to ignore. So it seems that the insurance premium paid via the put option is not that bad.

“I think what I’ll do is spend HALF of what I plan to spend on options this week and hold the rest in my back pocket”

I think that’s a good strategy.

And how do you choose amongst the different strikes ? I usually stay away from out-of-the-money options and focus on options that are in-the-money a little bit, and just look at the BEP% to see if it’s reasonable (by gut feel). I wonder if there’s a more scientific way to do it.

I am with you on the QQQQ Jan 2008 puts. I wrote some on the other thread, if you saw it.

I think your analysis is fairly good. I just want to add, that the Nasdaq might drop 10% earlier than by Jan 2008, and then you could take even higher profit since there is premium left in your option. The premium generally shrinks a lot when the market moves in your direction, so it is not going to be much. But if volatility picks up, premiums could be slightly higher.

Also, even if you don’t want to take profits after a 10% drop, you can still write another option for Jan 2008 for a 20% drop (another 9% drop), at which you would have to take profit then. This second option would give you a credit of roughly about $1.50 (depending on time left and volatility), so if your original put was $3.50, you now can only lose $2.00. But you can also only make your stated return for the 20% drop (+$1.50) and not more.

Anyways, my point is that there are follow-up decisions possible, and the profit situation depends on the time. That’s why people say, for options you need a good timing.

I think ChrisJ wouldn’t short here, but Lance Lewis talked about it on Oct 1st. (http://www.lewiscapital.net)

Eric at iTulip.com made a good post yesterday about why he is shorting the market now. (Thanks, Perry for that tip on how to open a new window.)

He writes, “mostly I try to dump the asset class de jour near–not at–the top of the current bubble cycle and go to cash while looking for the next one to ride. I do take sometimes take some short positions in the transitions, but these are never more than 10% of my portfolio. Two reasons. One, as Jeff points out, hardly anyone gets the timing right to pull it off. Two, if you buy and sell trend changes near the top and near the bottom, you don’t have to.”

If we see hyperinflation of the type described, wouldn;t a sound strategy be to borrow as much as one can in today’s dollars and buy hard assets like real estate ?

PS Do you think we are headed this direction (excessive inflation) or the deflationary spiral direction ?

I have no clue about deflation or inflation, but I like to read iTulip and Mish’s Global Economic Trend Analysis and Roubini’s blog. I will keep reading their stuff.

Eric Janszen has an interesting inflation/deflation theory, which he developed a few years ago and recently revised, and its based on what happened in the credit bubble of the Great Depression. The guy is simply briliant. It’s his KaPoom theory, and is worth a read.

I don’t understand today’s homebuiler rally. Home Depot reported worse than expected earnings, DHI reported poor earnings but apparently beat analysts.

Regardless, just another short term upward blip, good shorting opportunity none the less.

For options, I suggest looking into Jan 09 puts in addition to 08. I am not convinced the market will tank by Jan 08, but by 09 for sure.

I asked Adam Hamilton at Zeal, what is the best way to buy gold coins, and he suggested internet dealer Franklin Sanders, author of the newsletter “The Money Changer”.

He also wrote that “any local coin dealer is fine as the coins are totally fungible. My favorite internet dealer though is Franklin Sanders. He is a newsletter
writer “The Money Changer” and gold dealer with impeccable honor and integrity. I respect him tremendously.”