E Managing VIX-Leveraged ETPs Through Earnings Season, Political Strife And A Frothy Market

In 2015, I penned my first article on the subject matter surrounding VIX-leveraged ETF/ETNs. Back then, as if it were that long ago, there really weren’t too many well-articulated articles and practical insights for utilizing these instruments to help one boost their portfolio’s performance.  Since I had some writing experience, understanding and grammar skills I decided to see if I could generate some articles for investors/traders to connect.  And so it was the genesis of my ongoing series of articles that would hopefully inform even the most novice of investor/trader as to how to best utilize VIX-leveraged ETF/ETNs. The first of these articles was published in December of 2015 and titled Year-End Positioning With UVXY Opportunity Highlighted.  The article allowed me to dip my toe in the water and introduce myself to a new audience of investors/traders.  Below is an excerpt from the article: 

 

On top of these trades, I've been amassing trading positions in what I refer to as a portfolio piggy bank known as the ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY). While I would love nothing more than to explain to readers/traders/investors how the UVXY works in great detail, it's more poignantly described by stating that the trading instrument is "designed to fall in price".

 

Designed to fall in price, decay in price, erode in price. There was a variety of choices that I can critique my verbiage for with hindsight, but if we fast forward to the present that is exactly what has continued to occur, a constant decay in share price. And since 2015 I’ve written at least two dozen more articles on this subject matter, all the while maintaining a core, short position in shares of UVXY.  Naturally, since UVXY is designed to decay in price, ProShares must enact a reverse split in the instrument otherwise it would have gone to zero a long time ago. So for those just tuning in and seeing Friday’s closing price of $8.56 per share, don’t be alarmed when it begins trading at $34ish a share on Monday July 17, 2017.  Several weeks ago, ProShares announced a scheduled reverse split for UVXY and other instruments. This will be the eighth reverse split since it commenced trading in 2011. If we add them up that averages to just over one reverse split annually.  So if you like sure things, this instrument has definitively delivered.  OK, that sound a bit salacious I’m sure, but you get the picture: It’s designed to decay in price and that’s exactly what it has done. Here’s a visual aid regarding the past and pending reverse split:

 

 

The reverse split for UVXY should place the share price right around $34.25 come Monday. Why is this relevant? Well, it’s relevant because the instrument will now have more beta than in recent months due to the share price. Below $10 a share UVXY had far less beta, which equates to smaller, dollar moves in the share price be it up or down.  For an instrument that is correlated to VIX Futures, UVXY couldn’t touch $12 a share from the $9 level recently and in the face of Spot VIX jumping from the 9s to nearly 13 only a month ago.  But now, with a reverse split taking UVXY’s share price into the $30s, well, trust there will be more outsized moves in the near-term. 

It has taken ProShares only 6 months to enact yet another reverse split for shares of UVXY, in part due to the rally in the stock market since the November 2016 election that has served to also suppress volatility.  Coupled with the element of contango that is ever present in UVXY, shorting shares of the instrument has been a treasure trove for investors/traders. I’ve described the “short instrument” as the investment of the decade given its unique construction paired with a bull market cycle.  This is not to suggest that in a bear market, UVXY could not deliver outsized returns for short participants, but rather not to the degree as they do during a bull market cycle. Since 2011 and during this bull market cycle, shares of UVXY have offered a greater than 90% ROIC short. Not too shabby and if you have the stomach to withstand some unpleasantries that come with shorting a VIX-leveraged ETF. 

“Fits and starts” in the market can spur great moves in volatility/VIX, moving shares of UVXY against short positions to a great degree. As such, if one doesn’t manage these moves with a sound trading strategy, they can become disenfranchised with the instrument and miss out on strong returns for the sake of fear and loathing. If I were to offer a word of caution and/or limited advice I’d have to say to novice and even intermediate investors, “When choosing to engage VIX-leveraged ETF/ETNs for the first time, do so with a guide, resources and a proven strategy or person to facilitate your experience and learning”.  If this sounds like a warning more so than advice, trust me when I suggest that most every conversation surrounding VIX-leverage ETF/ETNs do sound that way. It’s something one comes to accept and understand over time. Time, there’s another word or variable that investors/traders will want to use to its greatest advantage when it comes to VIX-leveraged ETF/ETNs participation and as such one of the reasons I participate with shares as opposed to options. Soapbox, jumping off now! And we’re only half way through, so pay attention.

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Disclosure: I am short UVXY and VXX. I intend to trade shares of TGT and JCP over the next 6-12 month period.

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