[stockstradr]

When we say dollar will decline, are we saying that it is against just the ‘real’ stuff like gold/oil/houses, or also against other (fiat) currencies.

I’m not sure if your question is rhetorical? (If it isn’t and you really do not have an understanding of the most basic concepts in economics, then suggest you take a community college course in introductory economics)

A decline in the dollar is another way of saying we’ll have inflation. By definition, most things will cost more in nominal dollars. If your salary does NOT keep pace with that inflation (and it won’t for most Americans) then your standard of living will be falling. However, I’m also implying I believe the dollar will fall dramatically in value relative to a basket of foreign currencies. If the dollar is worth less in Chinese RMB, then one would expect every item imported from China will cost more in dollars.

Money is subject to the laws of supply and demand, just like everything. This is why Zimbabwe has hyperinflation. Let’s say that Zimbabwe had one trillion Zimbabwe “dollars” of their currency in circulation. The government leaders wanted to buy more things, pay salaries (and bribes) but obviously they didn’t have any sufficient positive net monetary in-flows. So they literally just printed money, and used that. When they, for example, double the amount of Zimbabwe dollars in circulation from one trillion to two trillion, guess what happens to the prices of everything? Do the math.

We are kinda saying the same thing could happen with the dollar, with shocks from both sides: 1) our government has in fact started printing money now, adding billions into circulation. 2) The world is trading out of dollars, dumping dollars for other currencies. This effectively INCREASES the amount of dollars per capita for those still using dollars, and increases the available dollars in circulation because of a glut of dollars in circulation for fewer dollar transactions.

[stockstradr]

When we say dollar will decline, are we saying that it is against just the ‘real’ stuff like gold/oil/houses, or also against other (fiat) currencies.

I’m not sure if your question is rhetorical? (If it isn’t and you really do not have an understanding of the most basic concepts in economics, then suggest you take a community college course in introductory economics)

A decline in the dollar is another way of saying we’ll have inflation. By definition, most things will cost more in nominal dollars. If your salary does NOT keep pace with that inflation (and it won’t for most Americans) then your standard of living will be falling. However, I’m also implying I believe the dollar will fall dramatically in value relative to a basket of foreign currencies. If the dollar is worth less in Chinese RMB, then one would expect every item imported from China will cost more in dollars.

Money is subject to the laws of supply and demand, just like everything. This is why Zimbabwe has hyperinflation. Let’s say that Zimbabwe had one trillion Zimbabwe “dollars” of their currency in circulation. The government leaders wanted to buy more things, pay salaries (and bribes) but obviously they didn’t have any sufficient positive net monetary in-flows. So they literally just printed money, and used that. When they, for example, double the amount of Zimbabwe dollars in circulation from one trillion to two trillion, guess what happens to the prices of everything? Do the math.

We are kinda saying the same thing could happen with the dollar, with shocks from both sides: 1) our government has in fact started printing money now, adding billions into circulation. 2) The world is trading out of dollars, dumping dollars for other currencies. This effectively INCREASES the amount of dollars per capita for those still using dollars, and increases the available dollars in circulation because of a glut of dollars in circulation for fewer dollar transactions.

[stockstradr]

When we say dollar will decline, are we saying that it is against just the ‘real’ stuff like gold/oil/houses, or also against other (fiat) currencies.

I’m not sure if your question is rhetorical? (If it isn’t and you really do not have an understanding of the most basic concepts in economics, then suggest you take a community college course in introductory economics)

A decline in the dollar is another way of saying we’ll have inflation. By definition, most things will cost more in nominal dollars. If your salary does NOT keep pace with that inflation (and it won’t for most Americans) then your standard of living will be falling. However, I’m also implying I believe the dollar will fall dramatically in value relative to a basket of foreign currencies. If the dollar is worth less in Chinese RMB, then one would expect every item imported from China will cost more in dollars.

Money is subject to the laws of supply and demand, just like everything. This is why Zimbabwe has hyperinflation. Let’s say that Zimbabwe had one trillion Zimbabwe “dollars” of their currency in circulation. The government leaders wanted to buy more things, pay salaries (and bribes) but obviously they didn’t have any sufficient positive net monetary in-flows. So they literally just printed money, and used that. When they, for example, double the amount of Zimbabwe dollars in circulation from one trillion to two trillion, guess what happens to the prices of everything? Do the math.

We are kinda saying the same thing could happen with the dollar, with shocks from both sides: 1) our government has in fact started printing money now, adding billions into circulation. 2) The world is trading out of dollars, dumping dollars for other currencies. This effectively INCREASES the amount of dollars per capita for those still using dollars, and increases the available dollars in circulation because of a glut of dollars in circulation for fewer dollar transactions.

[stockstradr]

So it that a paper gain or booked profit ?

I must admit, I was reporting increase in paper profit over a two-day period. Also, I didn’t include the paper profit made on gold in my wife’s portfolio; I increased her 401K by 20% in about ten days. She’s thrilled.

I haven’t sold and I’m still holding all my gold. I see gold was up today, charts showing NY spot price is at a 30-day high.

I don’t have the answers on when to book profits on gold, but I’ll share my GUESSES on the gold market.

I believe this week was one of the most significant inflection points for gold in many years. The collapse of the dollar will now accelerate as the world is losing confidence in America’s ability to handle a national debt apparently expanding exponentially (Wars we cannot afford, Social Security underfunded, previously existing national debt, trade deficit, bailout of Fannie/Freddie, AND AIG, AND Bear Stearns, AND now the MASSIVE sector-wide bailout of the entire banking and mortgage system, buying up all their bad debt).

As the world now starts to flee the dollar, the Million Dollar Question is WHAT will they trade their millions of dollars into? EUROS? GOLD? RMB? Swiss Francs?

The markets answered this week: at least in part, as some are clearly trading into gold.

While some of that was simply driven by fear (seeking safe haven from market chaos), the last 24 hours were very revealing.

I think you would agree that with the announcement of the new wider bailout, at least there has been an increase in the perception of increased market stability. Then as expected the stock market rallied, but we would have expected to see the gold market turn south as money moved back from gold into stocks.

That didn’t happen.

Instead, gold showed strength – because investors saw that the new bailout plan involves TRILLIONS more of debt load on the shoulders of the dollar, making it far more inevitable our government will eventually (or immediately) be forced to inflate its way out of this debt load, by devaluing the dollar.

So, I believe the dollar now renews its decline, and gold will soar through $1,000/ounce within months (or weeks) and then head towards $2,000/ounce.

[stockstradr]

So it that a paper gain or booked profit ?

I must admit, I was reporting increase in paper profit over a two-day period. Also, I didn’t include the paper profit made on gold in my wife’s portfolio; I increased her 401K by 20% in about ten days. She’s thrilled.

I haven’t sold and I’m still holding all my gold. I see gold was up today, charts showing NY spot price is at a 30-day high.

I don’t have the answers on when to book profits on gold, but I’ll share my GUESSES on the gold market.

I believe this week was one of the most significant inflection points for gold in many years. The collapse of the dollar will now accelerate as the world is losing confidence in America’s ability to handle a national debt apparently expanding exponentially (Wars we cannot afford, Social Security underfunded, previously existing national debt, trade deficit, bailout of Fannie/Freddie, AND AIG, AND Bear Stearns, AND now the MASSIVE sector-wide bailout of the entire banking and mortgage system, buying up all their bad debt).

As the world now starts to flee the dollar, the Million Dollar Question is WHAT will they trade their millions of dollars into? EUROS? GOLD? RMB? Swiss Francs?

The markets answered this week: at least in part, as some are clearly trading into gold.

While some of that was simply driven by fear (seeking safe haven from market chaos), the last 24 hours were very revealing.

I think you would agree that with the announcement of the new wider bailout, at least there has been an increase in the perception of increased market stability. Then as expected the stock market rallied, but we would have expected to see the gold market turn south as money moved back from gold into stocks.

That didn’t happen.

Instead, gold showed strength – because investors saw that the new bailout plan involves TRILLIONS more of debt load on the shoulders of the dollar, making it far more inevitable our government will eventually (or immediately) be forced to inflate its way out of this debt load, by devaluing the dollar.

So, I believe the dollar now renews its decline, and gold will soar through $1,000/ounce within months (or weeks) and then head towards $2,000/ounce.

[stockstradr]

So it that a paper gain or booked profit ?

I must admit, I was reporting increase in paper profit over a two-day period. Also, I didn’t include the paper profit made on gold in my wife’s portfolio; I increased her 401K by 20% in about ten days. She’s thrilled.

I haven’t sold and I’m still holding all my gold. I see gold was up today, charts showing NY spot price is at a 30-day high.

I don’t have the answers on when to book profits on gold, but I’ll share my GUESSES on the gold market.

I believe this week was one of the most significant inflection points for gold in many years. The collapse of the dollar will now accelerate as the world is losing confidence in America’s ability to handle a national debt apparently expanding exponentially (Wars we cannot afford, Social Security underfunded, previously existing national debt, trade deficit, bailout of Fannie/Freddie, AND AIG, AND Bear Stearns, AND now the MASSIVE sector-wide bailout of the entire banking and mortgage system, buying up all their bad debt).

As the world now starts to flee the dollar, the Million Dollar Question is WHAT will they trade their millions of dollars into? EUROS? GOLD? RMB? Swiss Francs?

The markets answered this week: at least in part, as some are clearly trading into gold.

While some of that was simply driven by fear (seeking safe haven from market chaos), the last 24 hours were very revealing.

I think you would agree that with the announcement of the new wider bailout, at least there has been an increase in the perception of increased market stability. Then as expected the stock market rallied, but we would have expected to see the gold market turn south as money moved back from gold into stocks.

That didn’t happen.

Instead, gold showed strength – because investors saw that the new bailout plan involves TRILLIONS more of debt load on the shoulders of the dollar, making it far more inevitable our government will eventually (or immediately) be forced to inflate its way out of this debt load, by devaluing the dollar.

So, I believe the dollar now renews its decline, and gold will soar through $1,000/ounce within months (or weeks) and then head towards $2,000/ounce.

[stockstradr]

So it that a paper gain or booked profit ?

I must admit, I was reporting increase in paper profit over a two-day period. Also, I didn’t include the paper profit made on gold in my wife’s portfolio; I increased her 401K by 20% in about ten days. She’s thrilled.

I haven’t sold and I’m still holding all my gold. I see gold was up today, charts showing NY spot price is at a 30-day high.

I don’t have the answers on when to book profits on gold, but I’ll share my GUESSES on the gold market.

I believe this week was one of the most significant inflection points for gold in many years. The collapse of the dollar will now accelerate as the world is losing confidence in America’s ability to handle a national debt apparently expanding exponentially (Wars we cannot afford, Social Security underfunded, previously existing national debt, trade deficit, bailout of Fannie/Freddie, AND AIG, AND Bear Stearns, AND now the MASSIVE sector-wide bailout of the entire banking and mortgage system, buying up all their bad debt).

As the world now starts to flee the dollar, the Million Dollar Question is WHAT will they trade their millions of dollars into? EUROS? GOLD? RMB? Swiss Francs?

The markets answered this week: at least in part, as some are clearly trading into gold.

While some of that was simply driven by fear (seeking safe haven from market chaos), the last 24 hours were very revealing.

I think you would agree that with the announcement of the new wider bailout, at least there has been an increase in the perception of increased market stability. Then as expected the stock market rallied, but we would have expected to see the gold market turn south as money moved back from gold into stocks.

That didn’t happen.

Instead, gold showed strength – because investors saw that the new bailout plan involves TRILLIONS more of debt load on the shoulders of the dollar, making it far more inevitable our government will eventually (or immediately) be forced to inflate its way out of this debt load, by devaluing the dollar.

So, I believe the dollar now renews its decline, and gold will soar through $1,000/ounce within months (or weeks) and then head towards $2,000/ounce.

[stockstradr]

So it that a paper gain or booked profit ?

I must admit, I was reporting increase in paper profit over a two-day period. Also, I didn’t include the paper profit made on gold in my wife’s portfolio; I increased her 401K by 20% in about ten days. She’s thrilled.

I haven’t sold and I’m still holding all my gold. I see gold was up today, charts showing NY spot price is at a 30-day high.

I don’t have the answers on when to book profits on gold, but I’ll share my GUESSES on the gold market.

I believe this week was one of the most significant inflection points for gold in many years. The collapse of the dollar will now accelerate as the world is losing confidence in America’s ability to handle a national debt apparently expanding exponentially (Wars we cannot afford, Social Security underfunded, previously existing national debt, trade deficit, bailout of Fannie/Freddie, AND AIG, AND Bear Stearns, AND now the MASSIVE sector-wide bailout of the entire banking and mortgage system, buying up all their bad debt).

As the world now starts to flee the dollar, the Million Dollar Question is WHAT will they trade their millions of dollars into? EUROS? GOLD? RMB? Swiss Francs?

The markets answered this week: at least in part, as some are clearly trading into gold.

While some of that was simply driven by fear (seeking safe haven from market chaos), the last 24 hours were very revealing.

I think you would agree that with the announcement of the new wider bailout, at least there has been an increase in the perception of increased market stability. Then as expected the stock market rallied, but we would have expected to see the gold market turn south as money moved back from gold into stocks.

That didn’t happen.

Instead, gold showed strength – because investors saw that the new bailout plan involves TRILLIONS more of debt load on the shoulders of the dollar, making it far more inevitable our government will eventually (or immediately) be forced to inflate its way out of this debt load, by devaluing the dollar.

So, I believe the dollar now renews its decline, and gold will soar through $1,000/ounce within months (or weeks) and then head towards $2,000/ounce.

[stockstradr]

I’m a total amateur at selecting options, so my methods are probably worthless, but here is what I do…

First, I don’t even think about options unless there is out-of-normal (variation) market fluctuation that I am VERY CERTAIN is coming, AND others haven’t priced that in yet. For example, the S&P500 is peaking at 1500, yet the housing market is collapsing, so I expect the stock market will fall dramatically.

Then…
1) I write down my hypothesis, such as, “The S&P500 will fall at least 10% in the next twelve months”
2) I look up the prices of options with expiration dates far beyond the time frame within which I think the market event will occur. (In anticipating market events, we are often biased to expect they will happen MUCH SOONER than they actually happen – we are biased by our wishful thinking! Just ask Rich and I when we originally guessed the home builder stocks would collapse!)
3) I pull down all the current pricing of a type of option, across a wide band of strike prices, and dump them into my Excel spreadsheet. Often there may be 100 rows of various options (for example, all PUTS on the S&P500 that expire 12 to 36 months out.)
4) Using steps in my hypothesis (Market drops 10%, 15% and 20%), the columns in the spreadsheet calculate: A) % return on investment; B) % market drop required to reach break-even on purchase of a particular option; C) actual net profit on one contract

Using that data, my spreadsheet plots curves of % ROI as a function of strike price, plotting separate curves for each step of my hypotheses (For example, -10%, -15%, -20% market move of S&P500)

I also plot break even point (expressed as the min % of market move required to reach break even on a particular option) against strike price.

The curves are most important: I chose options by looking over those curves. Understand, each chart with curves is for options with the same exp date, but I may create several similar charts to compare curves for different expiration dates.

I usually end up buying the options that break even after a very small fraction (as little as 3% to 5%) of my anticipated market move…and also are close to the MAXIMA of my lower %ROI curve, plotted for the conservative value of the correction (in this case 10%) that I expect.

Of course, this kind of analysis will typically steer you away from those dirt cheap out-of-the-money options…to options that inevitably have much higher nominal prices because they are in or near to in the money. I’ll typically buy options that might be $5, $10, or more each. So you’re talking maybe $5,000 for 10 contracts. So this is a safer way but requires larger amounts of money, compared to gambling say $500 on $0.50 out-of-the money options.

You see the reason I don’t chose the $0.50 options that maybe maximize the ROI for a much larger market perturbation (such as a 20% fall in the S&P500) is that the break even point on those options will require a market perturbation that is much less likely (such as a 10% or even 20% move in the underlying security)

People think options are risky, and yes they are. But consider that I bought PUTS on the S&P500 back in Oct ’07 when the S&P500 was over 1500….and yet those options had a break even that only required a ~3% drop in the S&P500!

Were those particular options THAT risky, given market and the unfolding economic conditions? I don’t think so. That’s why I spent 7% of my entire portfolio buying them.

[stockstradr]

I’m a total amateur at selecting options, so my methods are probably worthless, but here is what I do…

First, I don’t even think about options unless there is out-of-normal (variation) market fluctuation that I am VERY CERTAIN is coming, AND others haven’t priced that in yet. For example, the S&P500 is peaking at 1500, yet the housing market is collapsing, so I expect the stock market will fall dramatically.

Then…
1) I write down my hypothesis, such as, “The S&P500 will fall at least 10% in the next twelve months”
2) I look up the prices of options with expiration dates far beyond the time frame within which I think the market event will occur. (In anticipating market events, we are often biased to expect they will happen MUCH SOONER than they actually happen – we are biased by our wishful thinking! Just ask Rich and I when we originally guessed the home builder stocks would collapse!)
3) I pull down all the current pricing of a type of option, across a wide band of strike prices, and dump them into my Excel spreadsheet. Often there may be 100 rows of various options (for example, all PUTS on the S&P500 that expire 12 to 36 months out.)
4) Using steps in my hypothesis (Market drops 10%, 15% and 20%), the columns in the spreadsheet calculate: A) % return on investment; B) % market drop required to reach break-even on purchase of a particular option; C) actual net profit on one contract

Using that data, my spreadsheet plots curves of % ROI as a function of strike price, plotting separate curves for each step of my hypotheses (For example, -10%, -15%, -20% market move of S&P500)

I also plot break even point (expressed as the min % of market move required to reach break even on a particular option) against strike price.

The curves are most important: I chose options by looking over those curves. Understand, each chart with curves is for options with the same exp date, but I may create several similar charts to compare curves for different expiration dates.

I usually end up buying the options that break even after a very small fraction (as little as 3% to 5%) of my anticipated market move…and also are close to the MAXIMA of my lower %ROI curve, plotted for the conservative value of the correction (in this case 10%) that I expect.

Of course, this kind of analysis will typically steer you away from those dirt cheap out-of-the-money options…to options that inevitably have much higher nominal prices because they are in or near to in the money. I’ll typically buy options that might be $5, $10, or more each. So you’re talking maybe $5,000 for 10 contracts. So this is a safer way but requires larger amounts of money, compared to gambling say $500 on $0.50 out-of-the money options.

You see the reason I don’t chose the $0.50 options that maybe maximize the ROI for a much larger market perturbation (such as a 20% fall in the S&P500) is that the break even point on those options will require a market perturbation that is much less likely (such as a 10% or even 20% move in the underlying security)

People think options are risky, and yes they are. But consider that I bought PUTS on the S&P500 back in Oct ’07 when the S&P500 was over 1500….and yet those options had a break even that only required a ~3% drop in the S&P500!

Were those particular options THAT risky, given market and the unfolding economic conditions? I don’t think so. That’s why I spent 7% of my entire portfolio buying them.

[stockstradr]

I’m a total amateur at selecting options, so my methods are probably worthless, but here is what I do…

First, I don’t even think about options unless there is out-of-normal (variation) market fluctuation that I am VERY CERTAIN is coming, AND others haven’t priced that in yet. For example, the S&P500 is peaking at 1500, yet the housing market is collapsing, so I expect the stock market will fall dramatically.

Then…
1) I write down my hypothesis, such as, “The S&P500 will fall at least 10% in the next twelve months”
2) I look up the prices of options with expiration dates far beyond the time frame within which I think the market event will occur. (In anticipating market events, we are often biased to expect they will happen MUCH SOONER than they actually happen – we are biased by our wishful thinking! Just ask Rich and I when we originally guessed the home builder stocks would collapse!)
3) I pull down all the current pricing of a type of option, across a wide band of strike prices, and dump them into my Excel spreadsheet. Often there may be 100 rows of various options (for example, all PUTS on the S&P500 that expire 12 to 36 months out.)
4) Using steps in my hypothesis (Market drops 10%, 15% and 20%), the columns in the spreadsheet calculate: A) % return on investment; B) % market drop required to reach break-even on purchase of a particular option; C) actual net profit on one contract

Using that data, my spreadsheet plots curves of % ROI as a function of strike price, plotting separate curves for each step of my hypotheses (For example, -10%, -15%, -20% market move of S&P500)

I also plot break even point (expressed as the min % of market move required to reach break even on a particular option) against strike price.

The curves are most important: I chose options by looking over those curves. Understand, each chart with curves is for options with the same exp date, but I may create several similar charts to compare curves for different expiration dates.

I usually end up buying the options that break even after a very small fraction (as little as 3% to 5%) of my anticipated market move…and also are close to the MAXIMA of my lower %ROI curve, plotted for the conservative value of the correction (in this case 10%) that I expect.

Of course, this kind of analysis will typically steer you away from those dirt cheap out-of-the-money options…to options that inevitably have much higher nominal prices because they are in or near to in the money. I’ll typically buy options that might be $5, $10, or more each. So you’re talking maybe $5,000 for 10 contracts. So this is a safer way but requires larger amounts of money, compared to gambling say $500 on $0.50 out-of-the money options.

You see the reason I don’t chose the $0.50 options that maybe maximize the ROI for a much larger market perturbation (such as a 20% fall in the S&P500) is that the break even point on those options will require a market perturbation that is much less likely (such as a 10% or even 20% move in the underlying security)

People think options are risky, and yes they are. But consider that I bought PUTS on the S&P500 back in Oct ’07 when the S&P500 was over 1500….and yet those options had a break even that only required a ~3% drop in the S&P500!

Were those particular options THAT risky, given market and the unfolding economic conditions? I don’t think so. That’s why I spent 7% of my entire portfolio buying them.

[stockstradr]

I’m a total amateur at selecting options, so my methods are probably worthless, but here is what I do…

First, I don’t even think about options unless there is out-of-normal (variation) market fluctuation that I am VERY CERTAIN is coming, AND others haven’t priced that in yet. For example, the S&P500 is peaking at 1500, yet the housing market is collapsing, so I expect the stock market will fall dramatically.

Then…
1) I write down my hypothesis, such as, “The S&P500 will fall at least 10% in the next twelve months”
2) I look up the prices of options with expiration dates far beyond the time frame within which I think the market event will occur. (In anticipating market events, we are often biased to expect they will happen MUCH SOONER than they actually happen – we are biased by our wishful thinking! Just ask Rich and I when we originally guessed the home builder stocks would collapse!)
3) I pull down all the current pricing of a type of option, across a wide band of strike prices, and dump them into my Excel spreadsheet. Often there may be 100 rows of various options (for example, all PUTS on the S&P500 that expire 12 to 36 months out.)
4) Using steps in my hypothesis (Market drops 10%, 15% and 20%), the columns in the spreadsheet calculate: A) % return on investment; B) % market drop required to reach break-even on purchase of a particular option; C) actual net profit on one contract

Using that data, my spreadsheet plots curves of % ROI as a function of strike price, plotting separate curves for each step of my hypotheses (For example, -10%, -15%, -20% market move of S&P500)

I also plot break even point (expressed as the min % of market move required to reach break even on a particular option) against strike price.

The curves are most important: I chose options by looking over those curves. Understand, each chart with curves is for options with the same exp date, but I may create several similar charts to compare curves for different expiration dates.

I usually end up buying the options that break even after a very small fraction (as little as 3% to 5%) of my anticipated market move…and also are close to the MAXIMA of my lower %ROI curve, plotted for the conservative value of the correction (in this case 10%) that I expect.

Of course, this kind of analysis will typically steer you away from those dirt cheap out-of-the-money options…to options that inevitably have much higher nominal prices because they are in or near to in the money. I’ll typically buy options that might be $5, $10, or more each. So you’re talking maybe $5,000 for 10 contracts. So this is a safer way but requires larger amounts of money, compared to gambling say $500 on $0.50 out-of-the money options.

You see the reason I don’t chose the $0.50 options that maybe maximize the ROI for a much larger market perturbation (such as a 20% fall in the S&P500) is that the break even point on those options will require a market perturbation that is much less likely (such as a 10% or even 20% move in the underlying security)

People think options are risky, and yes they are. But consider that I bought PUTS on the S&P500 back in Oct ’07 when the S&P500 was over 1500….and yet those options had a break even that only required a ~3% drop in the S&P500!

Were those particular options THAT risky, given market and the unfolding economic conditions? I don’t think so. That’s why I spent 7% of my entire portfolio buying them.

[stockstradr]

I’m a total amateur at selecting options, so my methods are probably worthless, but here is what I do…

First, I don’t even think about options unless there is out-of-normal (variation) market fluctuation that I am VERY CERTAIN is coming, AND others haven’t priced that in yet. For example, the S&P500 is peaking at 1500, yet the housing market is collapsing, so I expect the stock market will fall dramatically.

Then…
1) I write down my hypothesis, such as, “The S&P500 will fall at least 10% in the next twelve months”
2) I look up the prices of options with expiration dates far beyond the time frame within which I think the market event will occur. (In anticipating market events, we are often biased to expect they will happen MUCH SOONER than they actually happen – we are biased by our wishful thinking! Just ask Rich and I when we originally guessed the home builder stocks would collapse!)
3) I pull down all the current pricing of a type of option, across a wide band of strike prices, and dump them into my Excel spreadsheet. Often there may be 100 rows of various options (for example, all PUTS on the S&P500 that expire 12 to 36 months out.)
4) Using steps in my hypothesis (Market drops 10%, 15% and 20%), the columns in the spreadsheet calculate: A) % return on investment; B) % market drop required to reach break-even on purchase of a particular option; C) actual net profit on one contract

Using that data, my spreadsheet plots curves of % ROI as a function of strike price, plotting separate curves for each step of my hypotheses (For example, -10%, -15%, -20% market move of S&P500)

I also plot break even point (expressed as the min % of market move required to reach break even on a particular option) against strike price.

The curves are most important: I chose options by looking over those curves. Understand, each chart with curves is for options with the same exp date, but I may create several similar charts to compare curves for different expiration dates.

I usually end up buying the options that break even after a very small fraction (as little as 3% to 5%) of my anticipated market move…and also are close to the MAXIMA of my lower %ROI curve, plotted for the conservative value of the correction (in this case 10%) that I expect.

Of course, this kind of analysis will typically steer you away from those dirt cheap out-of-the-money options…to options that inevitably have much higher nominal prices because they are in or near to in the money. I’ll typically buy options that might be $5, $10, or more each. So you’re talking maybe $5,000 for 10 contracts. So this is a safer way but requires larger amounts of money, compared to gambling say $500 on $0.50 out-of-the money options.

You see the reason I don’t chose the $0.50 options that maybe maximize the ROI for a much larger market perturbation (such as a 20% fall in the S&P500) is that the break even point on those options will require a market perturbation that is much less likely (such as a 10% or even 20% move in the underlying security)

People think options are risky, and yes they are. But consider that I bought PUTS on the S&P500 back in Oct ’07 when the S&P500 was over 1500….and yet those options had a break even that only required a ~3% drop in the S&P500!

Were those particular options THAT risky, given market and the unfolding economic conditions? I don’t think so. That’s why I spent 7% of my entire portfolio buying them.

[stockstradr]

But it is also possible that it would happen very suddenly, without all involved parties holding hands.

I agree. Good point. The dollar could become unseated very suddenly, losing its stance as the world’s currency.

Here is a question I have been pondering for years:

A typical nation can generally manage the value of its currency because the vast majority of its currency is within its own borders, or at least under its control. However, with the Dollar, the situation is more complex.

In other words, if the trillions of dollars floating around the world are suddenly dumped by foreigners and traded into Euros/Gold/RMB/Swiss Francs….then WHAT CAN the Fed do to prevent the collapse of the dollar?

It seems to be that in that scenario, the value of the dollar would collapse. What am I missing?

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But it is also possible that it would happen very suddenly, without all involved parties holding hands.

I agree. Good point. The dollar could become unseated very suddenly, losing its stance as the world’s currency.

Here is a question I have been pondering for years:

A typical nation can generally manage the value of its currency because the vast majority of its currency is within its own borders, or at least under its control. However, with the Dollar, the situation is more complex.

In other words, if the trillions of dollars floating around the world are suddenly dumped by foreigners and traded into Euros/Gold/RMB/Swiss Francs….then WHAT CAN the Fed do to prevent the collapse of the dollar?

It seems to be that in that scenario, the value of the dollar would collapse. What am I missing?

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