Tracing with the overhead is a good idea - I never thought of using mine for that. It'll be kind of .... warm.
Solvy is a good idea, too. I've used it before, but I generally use it on fabrics with a nap (like velveteen or flannel). If I'm using a fabric with a smooth hand (like muslin), I'd just as soon trace the design. Muslin's good, if it's a high count, sturdy muslin. You could even go with two layers (tack them together first, or hoop them up together), if you wanted to give it more stability. Plus, it'll help hide any crossing threads in the back. But if you're careful about not carrying your threads, a good muslin should be just fine.
If you want a bit of info on using solvy for your pattern, I've got a couple articles on it here:
Using Solvy, part I: http://www.needlenthread.com/2006/10/transferring-embroidery-patterns.html
Using Solvy, part II http://www.needlenthread.com/2006/10/transferring-embroidery-patterns-solvy.html
Thing is, with solvy, general the whole pattern should fit in your hoop or frame. If it doesn't, you'd need to tack the solvy on first, so that you can move your hoop around without any problem.
In fact, if I were doing something 8.5x11, and I were going to use Solvy as my design transfer, I think I'd tack the project onto stretcher bar frames that could accommodate the whole piece.
Oh, and I prefer the Ultra Solvy, which is thicker than regular Solvy. Regular solvy is too much like plastic wrap, and really flimsy. But that's just my opinion....
If you're going to trace using the overhead, I'd just use a regular pencil. Preshrink your fabric, then cut it (at least two inches on all sides bigger than the design, though you may want to go with more...), then iron it well with spray starch, then trace it with a pencil. Be careful of using a hoop with a pencil trace, as you can rub the pencil off when you hold onto the hoop and the fabric (unless the whole design fits in your hoop - another good reason to use a set of stretcher bars....)
Hope that helps!