ProShares Trust Ultra VIX Short Term Futures ETFArca
Description
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Articles are coming out describing net inflows into vix etps. Very important for retail investors to read the prospectus and realize the volatility curve will shred this product into peices. **This is a trading vehicle and will not influence futures pricing**
UVXY is invested in volatility instruments and rolled forward each month. This plus the management fees reduces the value of the assets and the overall direction is downward as the contracts erode in value and then are rolled forward continually month to month. This is a declining asset pool. Therefore the price is always downward.
Pull up a 5 year chart or a chart from inception and you will see that 5 years ago this was a $5000 asset. As the shares get lower as the author warns, this is the time when ProShares reverse splits the common.
I sell cash secured puts that are out of the money and have a small chance of being put to me. It is a way to be paid while hoping for a decline in SPY and a rise in the value of the forward contracts and therefore a spike inUVXY. Immediately after a split I look to sell cash secured call verticals that are very short dated. But I would never just sell the call - that is an invitation to upside unexpected disaster. This is risk for a brief period as the pull downward takes over and I can get back to my usual strategy for a mildly volatile uptrending market.
The point here and the warning in the title is that after the reverse split, UVXY tends to accelerate to the downside and this wipes out the call buyers rather quickly. I am very cautious about how I sell puts after a reverse split after I consider the call vertical as an initial strategy and watch for erosion.
After which, my usual strategy - th eone I am now using is to sell 45 day puts that are 30 to 50 delta and watch these erode very quickly in the last 30 days. the reverse split initially messes this up as It is difficult to decide how far UVXY will initially decline - a tricky business.
If I were invested in calls I would be sure to work in multiples of 30 contracts. The reasoning is that the reverse splits can be 5 for 1, 3 for 1, 6 for 1 or 10 for 1. This will give the call owner an even number of contracts after the reverse split. But I always exit after the split is announced by ProShares because I trade options exclusively in this name. The post split contracts are considered and listed as "non-standard.' the spreads on these to use an old market expression - is wide enough to drive a truck through. This is always costly for the call owner doing business at the mid price with a wide bid ask spread.
I watch weekly and as the price gets lower for ProShares announcements as to the reverse split. Go directly to the ProShares website for this information. At times it is not picked up at the broker and not listed under the news tab for UVXY - a dangerous thing not to be aware of if an owner.
After the split there is an immediate short selling of the puts and a lot of cash secured call vertical selling and the price immediately declines - again usually, generally, declines. But there is always the black swan to contend with. That is the reason I sell cash secured puts a good ways below the current price.
correction now that I looked at what I wrote. The post split new contracts are regular options. The reverse split options that are in place before the split are nonstandard. My error.
There was no announcement posted on the ProShares website for a reverse split as of Friday. However it is sure to come in thhe near future at this price and $9.99 NAV for UVXY.
Good thought author
all the best.
The_Bitcoin_Boy
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@Spotshooter1983, Thanks for the explanation. I do expect a black swan event soon, or at least a bounce down from SPX 4000. We shall see.
The_dumpster_diver
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@kwood0319, I think there's no knowing until you know. The main point of the post is to inform buying uvxy is a trap from a structural pov. If you want long volatility exposure there are better ways
Constant hedging is not cost efficient. It is better to be late than early. I buy call verticals in UVXY only after the move to the upside is confirmed by trading up twice average true range. I use longer dated calls for the vertical and that way if it is not Volmageddon (February 2018), the killing of the Iranian Genera or the Covid March SPY drop I exit with a small stopped loss.
The idea of trying to guess the move is very costly. Moves can go on a very long time in any direction without a correction and that burns a lot of 30 delta portfolio insurance or naked lottery ticket call or common bets.
Here's the idea:
Since 2000 there have been 4 months of the 247 months with a 10% decline. that is 1.6% of the time.
There have been 30 months with a 5% decline. that is only 12% of the time.
feeling lucky?
It's a wasting asset lottery ticket that gets reverse split into oblivion every time.
Better to be short UVXY and endure the rises in a large portfolio - as a thought I have not acted on.
I game it by selling deep out of the money cash secured puts that are less than 45 days and 30 delta. Most of the time 30 deltas expired worthless but I exit in about 21 days remaining as the time decay ramps up and I harvest a profit. I also get to harvest the minor blips if they occur by buying these back before the 21 days.
There were 3% declines in only 42 months of the 247 months.
Heuristics - feelings - can be expensive.
We are at all time highs - that may or may not be a top.
Things can go on and do go on for very long periods of time..
Federal stimulus?
Impeachment over.
Covid vaccinations on the rise worldwide.
Who can say when markets decline in 74 of the 247 months?
No lotto tickets for me...
The_Bitcoin_Boy
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@Spotshooter1983, I had bought TVIX last February based on a feeling and it went 20x, sadly I only secured a portion of that. My reasoning for holding UVXY is that
1) There is over optimism in the market. The put /call ratio (PCE) has been at historic lows which is an contrarian indicator for reversal.
2) There are massive amounts of new robinhood traders who think stocks only go up, and will likely sell at the first sign of trouble.
3) Interest rates are on the rise which will trigger a shift from equities to bonds.
4) The market cap / real GDP (the buffet indicator) is higher than it's ever been even higher than the dot com bubble era.
5) Our market is more volatile than ever with huge swings in large cap stocks in a time where any trend stock is up 1000% and people think that's normal.
6) UVXY technical analysis does point to a falling wedge spike.
7) SPX just recently broke out of it's 10 year bull channel to the upside and is making new highs every week, which isn't sustainable.
8) The trading volume of UVXY grows every day and volume usually proceeds action. Something is brewing.
I also believe that covid was just the catalyst for the large drop last March, and we may see a bigger correction to come. To your point, this all may just be confirmation bias, but my small cap stocks have been outperforming my UVXY decay and the position continues to act as a hedge. So like I said, we shall see.
UVXY last March sat at $12 when SPY dropped twice average true range it was time to get invested in the calls as UVXY advanced to $17 that week. SPY levelled off for one week and then dropped. The drop propelled UVXY to $130. So there was a week to get or stay long. I trained a friend of my wife - the only person I have ever assisted. She sold UVXY at $18 on the rise. I had her write a detiled explanation as to why she took a small profit rather than adding to the position (Newbies : see Michael Covel's book "The Complete Turtle Trader" to get a jump start on trend trading fundamentals).
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A turtle trading strategy that I use is every time UVXY moves up twice average true range I sell a call vertical as my first investment. I did that 2 weeks ago and got out at a small loss. However in true turtlle trading style every time UVXY jumped twice the 20 day average true range 2 per cent more capital is invested until on the last investment 10% of capital total is invested. This was trend following at its finest when UVXY went $12 to $130. I so hope you are correct. I have the same list. But when is always the UVXY question.
The call vertical two weeks ago was a false rise. This happens with UVXY. I sold my cash secured puts and entered the call position. I have sold those puts several times in the last 7 weeks. If put to me at $9 in March, my cost is sub $7. I am being paid to wait and I like that. turtle rading is a way to extract maximum value in a true correction.
All of your points above are completely valid. So many companies at valuations that will be punished in a true bear correction. I completely understand. My apology if it seemed as if you were a newbie based on the reverse split destruction question you posted.
Think about a large family office portfolio. The idea that IBKR et al give these offices extremely low margin rates means that the opposite side can be taken. That is these portfolios can be permanently short UVXY and endure the three major spikes in value of the UVXY portfolio and then the continued downward pull of the wasting forward month roll of the assets.
$5000 to $10 in 5 years is a return not to sneeze at if you can afford to hold when UVXY spikes acting like portfolio insurance.
Somany ways to game this.
IBB and IWM are both seeing increased sector rotation and positive money flow. New stimulus money coming to the WSB Reddit mob...
We both would like a correction.
when is as ever the theta cost analysis as a drag on portfolio returns.
I try hard to get paid then enter..
Happy trading
all the very best.
sparo
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@Spotshooter1983, "It is better to be late than early". This is very true for UVXY. It is also true get out of UVXY early rather than late.