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The set-up: The Direxion Daily Small Cap Bear 3X (TZA) moves against the Russell 2000 Index, so you are trading it when you see the iShares Russell 2000 ETF ( IWM) heading down.

Since my most recent trade in TZA – roughly a week ago — I have been patiently waiting to re-short the IWM via put options or TZA. IWM put options are very volatile; while they can return 100%, they also can be damaging if you’re on the wrong side of the trade. I simply haven’t been able to get an entry price for a swing trade, so I’ve been patient.

My thinking: I don’t like the IWM here. Many small-cap stocks have more debt than cash. I think the index is set up for a fall and when the IWM crashes, it crashes hard, creating a nice potential profit if you are in a good trade on the short side.

My play: I’m expecting a significant drop in the IWM, well below $139, but I don’t know when it will happen, so I don’t want to buy put options any more given that they become worthless upon expiration and decay over time. This moves my interest and money to TZA instead.

I have traded TZA dozens of times through my trading career. At this point, as a follow through for shorting the IWM, I’m shifting from IWM puts to TZA. I plan on entering TZA in the $16/share area and would be willing to add if it dips. I’ll set my stops at -5 percent, but I’ll be expecting gains of up to 8 percent and will start taking profits with a move of 5 percent to the upside.

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Davis Martin is the head trader at Dailyprofitmachine.com. He trades SPY calls and puts and swing trades mid-large cap stocks and stock options. He most recently bought TZA on 7/5/17 and sold on 7/7/17 for a +3.2% profit. He has no open order or open positions on TZA but is watching closely, hoping to trade as described in this commentary.

Author:
Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com podcast where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share some of the wisdom needed to live a successful life.

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