Buying out-of-the-money options is indeed a dangerous game, unless you are absolutely convinced that the market is going to exceed the strike price within the time frame of the option. Out-of-the-moneys are attractive because of the small investment required to generate a huge return, but only if you get it right. According to research, 90% of options expire worthless.
The way to safeguard your investment is to choose an at-the-money or in-the-money, but my own opinion on this is that CFDs would then be a better bet due to the margin facility.
Your shorter term prediction for the market ties in with Mitch Meana's - the top is in (in the US indices) and the period between now and new year is likely to be negative. But then the dip buyers return, and we should see a one or two day rally. That is the time, as you rightly point out, to short the thing big time.
As for longer term, remember that according to Elliott, this next phase down should be made up of five waves, then a three wave recovery, then the next five waves down. Perhaps we'll see the first five waves in the period up to March/April, then a couple of months of a three wave rally, then, as you say, a deeper correction begins.
If this is all correct, 2004 is going to provide a wonderful opportunity to make some impressive returns. See you in Barbados......my yacht is the big one smothered in pretty girls.....
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