So I’m trying to build up a short position by accumulating bear ETF’s such as SPXU, TZA, etc. The market has been selling relentlessly for more than 2 weeks now until yesterday’s high volume reversal candle, which by the way still awaits confirmation. It’s too late and too risky to chase. So I can patiently wait for the bounce to get into position. But what if the market continues its relentless selling with no meaningful bounce? I can either take my chances and wait, or I can compromise a bit and get a leg in by selling short some naked puts.
Naked puts is extremely risky only if you don’t have the capital to back it up. The current price of TZA is 56. If I sell short a TZA Aug 48 put contract for $2.05 without shorting any shares to cover it, then I have a naked put. What this means is that at the August expiration if TZA share price stays above 48, then the option expires worthless and I keep the $205 premiums. On the other hand, if the price goes below 48, then I still keep the $205 premiums but I will have to buy 100 shares at the strike price of 48, even if it’s dropped to, say 20. This is when it’s dangerous, if you have no funds to cover the purchase.
This strategy would suit me well: If the market goes down without me, at least I get to collect some premiums which is substantial given the current high volatility; on the other hand, if the market bounces, I get to buy TZA at a much lower price than it is currently as I build my position.