…we have to know how much leverage we're talking about. For this, we must look at debt both on- and off-balance-sheet. We also must delve into the nuts and bolts of how American companies fund their daily operations.

America's total on-balance-sheet debt (i.e., household, business and financial, and government sectors not including unfunded pensions and medical promises) is now at about $53 trillion—the highest debt ratio in history.

Off-Balance Sheet Debt

About 10 years ago, a way to trade put options on debt emerged. This market is called the credit-default-swap (CDS) market.

Originally, it was supposed to be an insurance program for lenders, but, in 2005, large hedge funds figured out they could buy credit-default swaps for low premiums and, if the companies defaulted, they would receive huge cash settlements. These hedge funds didn't originate a loan and seek to buy insurance; they simply bought a CDS.

Essentially, they had a put option on a company's debt.

If the company did well, the hedge fund would lose its premium paid. If the company did poorly, then they would receive a significant amount of money.

Even if the company did not go out of business, the price paid for the debt insurance policy would rise (i.e., the spread would widen) and they could sell their policy (CDS) for a profit.

Ten years ago, the CDS market was about $1 trillion. Today, it's about $72 trillion in notional dollars (although there is some double-counting and other accounting complexities).

A Bird's Eye View

Domestic companies use short-term debt to fund their daily operations, which usually carries terms of 90 days or less. This short-term debt (or working capital) comes from money-market funds. Money-market funds have been able to offer investors slightly higher yields than Treasuries because they primarily buy short-term corporate debt.

Because the companies are large, have been around for years and the debt is short-term, money markets have been considered very safe. But, weakening trends in employment, housing, mortgage-backed securities, credit cards, auto loans, etc. have put even these solid companies in jeopardy.

To be clear, we have used Pilgrim's Pride only as a case study but it's far from being the only firm to get near the fire. Unfortunately, it's in good company with other names like Ingersoll-Rand (IR), Deere (DE) and Eaton Corp. (ETN), all of which recently closed at 52-week lows.

So that, in an "eggshell," is why the stock market today isn't likely to be fixed by even the most grandiose bailout plan. The good news is that you can take this opportunity to start using trading strategies you might have avoided in the past, like options trading.

If you're ready to start profiting in this market, join Nick Atkeson and Andrew Houghton at Big Money Options today. You'll get immediate access to a full portfolio of easy-to-execute options trades and the latest market info to help you navigate your way through the stock market! Click here now to learn how to get started absolutely risk-free.