After having a pretty good week shorting anything with a ticker (no, not really - just a few select names) and getting away with it, I got caught with my shorts up on Friday afternoon.  Who can predict green ticks higher than the Empire State Building that materialize while you're waiting by the microwave for coffee to warm?  So I decided to transmogrify the offending position into a Frankenstein's monster of sorts, fitting for the candy festival otherwise known as October 31st.

I booked a loss as such:

 Then opened a new position as such:

 

To compare the old, closed position with the new, open position, it goes like this:  On Friday I had sold short 800 TVIX at a price of 15.32 and then added 200 more short shares at a price of 16.63 (halfway up the Empire State Building) for an average short position from 15.58.  Today (October 31st as I write this) I bought those shares to cover at 17.46 to close that position at a hefty loss.

Then, trying to waste no time but apparently wasting opportunity ticks anyway, I opened a similar position slightly larger in size in the comparable security, UVXY.  I sold short 1,100 at 15.95, and to go with those shares, I sold eleven 14 strike puts for the November 11th expiration at a price of 0.87 each.  Here is how the position actually looked, value-wise, a few minutes after establishing it:

As you can see, the short position immediately moved against me, and the option immediately moved in my favor.  I had sold the puts for 0.87 and they were going for 0.81-0.83 a few minutes later.  As UVXY moved higher in share price, the puts became less valuable immediately.

Obviously there are only three real dispositions for the options, now that I have sold them.  I can buy them to close for a price higher than I sold them for (taking a loss), I can allow them to expire (worthless or with value), or I can buy them to close for a price lower than I sold them for (making a profit.)   Let's outline the possibilities in relation to my short shares.

For the price of the puts to be higher than my entry price, the underlying would likely move lower than it was at the time of entry.  Buying the puts to cover at a price higher than I sold them for is something I would consider if I wanted to close out the short shares for a profit, set any losses on the options against that, and clear my slate of the entire position.  I'd enjoy less of a profit on the short shares than if I had just shorted and covered the shares with no options associated.

Buying the puts to close for a price lower than my entry price, similarly, may occur if the price of the underlying moves lower than it was at the time of entry, but due to time premium eroding daily, option price may stay lower than  my entry price so that I may not have to take a loss on the options, and may make some kind of profit on them.  So I could profit from closing both the short shares and the options.  The other scenario is that the options price would be lower than my entry as share prices rise above my short-share entry price, so that I'd have a loss situation (realized or unrealized) regarding my short shares, but at least I'd be able to book some sort of profit on the short puts. (See third illustration for a depiction of how this began to unfold immediately after opening the positions.)

The last possibility is to allow the puts to expire (either worthless or with some value) on the expiration date of November 11th.  If UVXY ends above 14.00 I will have ended my obligations connected to the options and, assuming I still have the short shares (I'm not planning, in this instance, to have naked short puts, so I'll still have them if I carry the puts through expiration) I'll be free to keep or dispose of my short position after November 11th; the premium received through the sale of these puts will simply be extra income for me.

But if UVXY ends under 14.00, I'll have 1,100 shares of UVXY put to me. Any value remaining in the options will be of no concern to me if I choose to be subject to assignment.  The result will be a short position and a long position which I can then ask the brokerage to zero out for me (this equals the equivalent of buying my short shares to cover at 14.00, and this caps the profit I'd realize on the short shares.)

In any case, I don't have to trade in my short puts and I can keep the $941.54 brought in by them.  Assignment will result in a nice profit of 1.95 per share on the short shares, times 1,100 which equals $2,145 to add up to a total of about $3,087 on November 11th; remember that I just ate $1,902 so that's about $1,185 I'll be ahead two Fridays from now if all goes according to plan on this.

If it doesn't go as I envision, I'll be on the hook for some unknown amount of loss on the short shares, or I'll take some small or maybe even respectable amount of profit on them, but I'll have the "option" of  keeping every penny of the $941 I didn't have until I decided to sell the puts this morning.

What's it going to be for me - trick or treat?  Or trick, and then treat?  We'll find out and I'll report back on my bag full of goodies (or not!)