Profiting from Weekly Options. Seifert Robert J.

a way to move goods and people to new markets quickly, and the railroad was the perfect vehicle. It combined the ability to move bulk goods, as the river and canal system had, and it added the value of speed. It could move goods up to 400 miles a day; a trip that used to take weeks could now be accomplished in a couple of days.

      Prior to 1850, most of the railroads were short lines that joined with other short lines to form an irregular system. However, in 1850 the US Congress decided it was time to try and establish longer-haul routes that were contiguous and made available the first railroad land grants. During the next 20 years, legislators granted 170 million acres to roughly 85 railroad companies. Although substantial portions of the grants were never developed, the country still had enough track in place to circle the globe.

      One of the problems that Congress had not foreseen was the standardization of track. There was no Bill Gates to figure out that if one railroad had a different width of track than the next, it could create a problem, and, unfortunately, it created a massive one. With hundreds of railroads across the land and several different gauges, it became increasingly difficult to move goods over large areas without transferring to a new railroad each time the track size changed.

      The problem gradually resolved itself in the decades after the Civil War as the standardization of track took place and Congress continued to extend free land to the railroads in an attempt to connect the West to the rest of the country. As with any new technology, it seemed that this time was different and the market for railroads had no limit. It allowed for both a revolution in commerce as well as a social revolution. By 1880, you could travel from New York to San Francisco in less time than it took to go from New York to Washington, D.C., 50 years earlier.

      With innovation came the need for financing the next project, and who was better suited for that than Wall Street? By 1890, there was more than $12 billion (nearly $300 billion in 2014 dollars) invested in the industry. As with any successful product, competition came into play. Within 10 years of Leland Stanford driving the “golden spike” that completed the transcontinental railroad on May 10, 1869, at Promontory Summit in the Utah Territory, there were four competing railroads carrying passengers and goods across the country. Revenues began to shrink, but the cost of infrastructure continued to climb, latecomers started to have troubles, and some smaller railroads went under.

      On February 23, 1893, a major carrier, the Philadelphia and Reading Railroad, declared bankruptcy. This created a crisis of confidence (Lehman Brothers?), and investors began to panic and withdraw their money from the banking system. The federal government sought to stop the run by repealing legislation that tied the price of silver to the dollar, but that effort failed when more major railroads ceased to do business.

      The final result was that hundreds of railroads went broke; over 500 banks, the majority of them in the West, closed; and 15,000 other businesses went under. Unemployment in major manufacturing cities moved above 18 percent at the peak of the depression in 1894 and remained in double digits until the recovery began in 1897 with the Klondike Gold Rush.

      September 11, 2001: Price Can Never Go Up Again

      Although the three bubbles that we have observed were from different times and different places, they all had a common origin: speculation fueled the bubble. In each case, the perceived opportunity overcame rational thought. Even one of the most brilliant men in recorded history fell victim to the mass hysteria. So now the question must be asked: Is it possible to have a deflationary bubble?

      Could the price of an asset class be deflated with the same logic that causes the inflationary bubble?

      Consider Tuesday, September 11, 2001.

      I doubt that any living American will ever forget that morning. The impossible had happened; terrorists were able to take down American financial icons, the World Trade Centers in New York City. The markets reacted swiftly and viciously. If you were not lucky enough to close your positions, there was no way to reach financial safety.

      Within minutes of the second tower being hit, the exchanges were forced to close. The infrastructure damage was immense, and it would take a full week before they could reopen. Although authorities pleaded for calm, as a professional trader you sensed the result before the markets reopened: panic.

      When the markets resumed trading on Monday, September 17, the financial devastation of the attack was immediately apparent. The DJIA plummeted more than 4 percent on the opening bell. When the carnage stopped at 4:00, the Dow was down more than 7 percent.

      Rumors on the street flourished. Bin Laden was not only the mastermind of the attack but he had purchased millions of dollars of puts on the OEX. New attacks were on the way. The economies of the Western Allies had lost hundreds of billions, and it would take decades to recover. The rest of week was even worse. Every day, the decline accelerated. Investors refused buy any US asset. Treasury Bonds, which had been used as a “flight to quality” for more than 80 years, joined the rout.

      Friday morning, September 21, the economic news was horrible. There was no tomorrow; in a single stroke of violence, Bin Laden had realized his dream to bring the decadent Western world to its knees. The market opened down almost 5 percent from Thursday's close. The worst week in over 140 years was in the making. The futures markets were locked limit down. Economic Armageddon had arrived, and this time there was no bottom!

      And then it stopped.

      Some anonymous investor stepped up to the plate and bought. The market rallied the rest of the day to finish marginally lower; by December 31, 2001, it had rallied 23 percent from the bottom. Bin Laden did not accomplish his goal.

      The United States not only survived but continues to flourish. The masterminds of the plot are either dead or in captivity.

      The Commodity Bubble of 2008: Price Can Never Go Down Again

      The housing bubble has gotten extensive coverage in all forms of media, so it will not be discussed here. But one of the largest meltdowns in world history was in the works in a parallel universe, the commodity bust of 2008.

      The commodity panic was not limited to a specific country or a specific product. Modern trade and the speed of information allowed the panic to spread quickly across the world. The list of culprits is long. Evil speculators, farmers who overplanted fields, hoarders who withheld goods from the market, consumers who raced each other for more goods than they could possible use, and, of course, the pigs on Wall Street. Rather than take the time to go over each individual market, the focus of this story will be placed on the biggest commodity market in the world – crude oil.

      Crude oil has been a major source of energy for more than 150 years. Fortunes have been made and lost acquiring it. Nations have been built on its back. Nations have gone to war to acquire it. It is a god of wealth to some and the devil for others, but one thing is clear: Twenty-first-century society needs crude oil.

      The bubble in crude oil started as countless panics that preceded it, with a gradual inflation of price. Less than 10 years before the bubble burst, the price of crude oil was $17 a barrel.

      Iraq was selling as much as it could produce to cover its costly mistake with Kuwait and the resulting war with the US-led coalition. In addition, financial problems in the Far East reduced the demand, making it unprofitable to recover crude from marginal fields.

      Demand was not suppressed for long, though, and crude oil prices reached $60 a barrel in June 2005. By the summer of 2006, crude oil futures at the NYMEX peaked at $77 a barrel. After the summer surge, prices retreated and closed on New Year's Eve at $63. However, the uptrend did not halt for long. In September 2007, crude took out the previous year's high and closed at over $80 a barrel.

      Multiple factors were cited for the increase in price.

      US oil reserves had fallen to dangerous levels, OPEC was reducing production, leftist rebels had attacked and destroyed pipelines in Mexico, an El Nino was predicted, the US dollar was getting pummeled, there was social unrest in Turkey, and Elvis had been sighted in Reno. In November 2007, oil hit $90 a barrel on fears of social unrest in Turkey; the US dollar was getting pummeled. Every bit of news, no matter how bizarre and unrelated, was a reason to buy oil.

      On January 2, 2008, crude hit the magic $100 a barrel level. Prices