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.
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.