Leaning Short with No Options
The market has had a tremendous run. The Dow Industrials has run up 2,000 points since Feb. 8. The S&P 500 has advanced more than 12% in the same time period. After a run like that, it is time for a pause. We are adding two new exchange-traded fund (ETF) positions to our ETF Trader’s Edge portfolio today.
The first is the ProShares UltraShort Russell 2000 (TWM), an inverse ETF that seeks a return that is intended to be -2x the daily performance of the Russell 2000 Index. We expect that a market correction will be led by small-cap stocks, which have underperformed during the recent run up.
The other position to buy is the ProShares Ultra VIX Short-Term Futures ETF (UVXY), which is designed to produce a return that is 2x that of the S&P 500 VIX Short-Term Futures Index. Right now, we are in a low-volatility environment. If stock prices fall, volatility will increase. In such an instance, a volatility play such as UVXY would be positioned to profit by roughly double the drop.
We are buying both positions without an options component. We are doing this because we may see some sideways trading or even gains in the days ahead as the end of the latest quarter nears. With the time decay factor in options, we believe we can get better pricing by waiting. Stay tuned, we expect more short-term profits for you.
As you can see, both ETFs have pulled back significantly and will explode to the upside on the first sign of volatility. So as soon as you receive this alert, buy:
TWM, which closed yesterday at $40.07, and
UVXY, which closed yesterday at $21.56.
As for our existing portfolio, we will hold our iShares UltraShort Gold Miners ETF (GDXS) and Market Vectors Gold Miners ETF (GDX) April $18 Puts, as well as iShares 20+ Year Treasury Bond ETF (TLT) April $128 Puts. The momentum behind both ETFs has begun to wane and we believe we will see them both breakdown before the options expire in April. We are paying very close attention to decay in the options, so we opportunistically will sell them when the risk/reward factor warrants it.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
