PS, you clearly don’t understand the short process if you think you’ll lose it all with one rally. There is no way the homebuilders are going to rally that much. The key is to not over-extend yourself. You’ve been scared off by too many risk-averse advisors. If you limit your short exposure to 40% of your portfolio for example, you could weather approximately a 40% rally before getting a margin call. There is no chance the homebuilders are going to rally 40% in the next couple of years and you know that. Even if you get a margin call, you have to cover some of your shorts at a loss, but that doesn’t mean you’ll lose everything.
As for puts, I recommend going for more long term expiration dates (Jan08 and beyond). With this time frame, short term rallys will have no affect on your portfolio as long as you don’t need the money in that timeframe. I suggest droppping maybe 10% of your portfolio on puts. This way, absolute worst case you lose 10%, bid deal. But the potential upside gains are enourmous. You have to take a little risk if you want to make money, that’s how it works. But 10% of your portfolio is not much of a risk. Plus, you’ll enjoy watching the housing crash even more if you have a little money bet on it.
