This market is quite insane and I used to run money back in the late 90s.

Wait till tomorrow about 2pm after the Fed speaks. Whipsaw time!

The market continues to rise making me sick because Im an idiot..all the while Im making a good deal of money on my options so lets talk about them.

Up to now Ive talked about "selling" options. I do "buy" options from time to time.

When you buy an option your risk is limited because you can only lose whatever you paid for them which usually isnt that much, but your profit potential is very high depending on the trade.

Heres the trade I made a week or so ago. The financial sector is getting hammered into oblivion. Credit worries, housing problems, foreclosures...blah blah blah.

As always, the stock market always overreacts to both good and bad news. Yes, the credit markets are in horrible shape, but most of that news is already priced into the stocks. Theyve already been hammered and most likely been hammered further down than they deserve...so I think they are going up over the next few months.

I bought call options on XLF (financial sector tracking stock). XLF was trading at around 33.50 or so when i made this trade. I have 3 criteria when picking a call option

1) I buy the one that has a strike price about 10% higher than thr stock price.
2) I buy the option that will expire in about 6 months
3) I sell it about 3 months before it expires.

The reason for selling it that early is that part of an options price is "time value". I bought the Jan2008 38. So it expires in Jan 2008 and the strike price is 38.

As this call option gets closer and closer to expiration, it will start to drop in price even when the stock doesnt move at all. This time value erodes faster and faster the closer it gets to expiration, which is why I sell it 3 months early. Normally the time value doesnt erode much before that.

Im going to trade this option, but by holding the option, I hold the "option" of buying 100 shares of XLF stock at 38 anytime between now and Jan 2008. if the stock is selling for 50 in Dec, I can still buy it for 38. I pay a price for that option.

These options were selling for .80 when I bought them. Thats $80 each. I bought 10 of them so I spent $800.

Right now XLF is trading for $35.10 and the option is selling for 1.20 (or $120) so I have a 50% return on my money if I sold them right now. I plan to hold them for the 3 months but could sell them early depending on what happens.

Sometimes these type trades are total losses and sometimes they are huge money makers. Ive made trades like this and lost the entire investment and Ive had some return over 1000% in less than a month. The key is to not put very much money into any one trade.

Update on the 2 put option trades I made. I was getting hammered on them but they are both looking very good now.

I sold 1 Aug75 put on BUCY. BUCY had fallen to around 61 and I had a big paper loss but now its trading at 74.10 as I write this. I took in a premium of 3.30 (or $330) when I sold it so my break even point is when BUCY trades at 71.70. This went from a total dog to a very good looking trade in 3 days.

I sold 2 Aug154 puts on SPY. This looked horrible 3 days ago also but SPY is now trading at 150.15. I sold the puts for 2.5 each so my break even point is $151.50. Im almost back into the black on this one. I had a $1500 paper loss just a few days ago.

The problem right now in the market is you have credit drying up and you'll probably have abotu 7 million people who took out a mortgage in the last 12 months that will be upside down in their houses. Will they just walk away from their mortgage?

When they do, what happens to the banks?
When the banks get pinched, what happens to all those deserving business that needed loans?
When those busniesses have to lay off people, then what?
What happens when people just stop spending less?

The Fed so far hasn't blinked and would prefer to see all the housing speculation wiped out even if it means a recession.

Those people shouldve thought about that before they bought a $400,000 house that everyone and their brother knew wasnt worth more than $250,000.

My brother in law signed a contract to have a house built in FtLauderdale are about 6 years ago. They started building it and before it was done, he sold it for a $60,000 profit and started having a new house built. That was going on all over the country. Buy for $300,000...sell 2 years later for $450,000. How long did people think that could keep happening before the housing market would imlpode?