Replies to post #3133 on ProShares Trust Ultra VIX Short Term Futures ETF (UVXY)

[eric4x]

Short-selling UVXY vs SVXY long.*

Here are the advantages and disadvantages, as I understand them:

UVXY is 2x and SVXY is 1x. So the gain of shorting UVXY should, at first glance, be twice the gain of SVXY long. But it goes beyond that. UVXY tends to drop because of contango, but BOTH funds lose money to fees. The built-in decay of SVXY makes it go up slower than it otherwise would, and the built-in decay of UVXY makes it go down faster than it otherwise would.*

For this reason, the gain of shorting UVXY would be MORE THAN twice the gain of SVXY long.*

However, short-selling carries the risk of a short-squeeze and a margin call, if or when the price goes up. This is the same for UVXY as it is for any proper stock, except that the risk is much greater. UVXY can suddenly jump in price, virtually without limit. For this reason, short sellers are advised to use a kind of "fractional reserve" system. You should only risk, let's say, one-fifth of your total portfolio, so you can be prepared for any spike.*

Of course, if you have reason to believe that a spike is coming, or that a spike already in progress will go much further, then you would have to close the short sale and get out quickly.*
--*

Note: I am just starting out, with a small account. My account size isn't big enough yet to follow anyone's trading strategy, including my own. So for the time being, I am just trying to gain basic trading experience, and see what I can learn for future reference.*

[DrContango]

DC your post was very helpful thank you.

I assume, betting on little/no upward movement in VIX Futures (K3, etc), you are shorting UVXY. Can you also just go long SVXY and achieve a similar gain given the scenario you described with the term structure, contango, etc also assuming little/no upward movement in VIX Futures (K3, etc)

Dear ZappaGuy:

First, thanks for the props!

Second, I hope that you realize that our avatars are just one degree of separation!

Third, Eric gave you a most excellent response that had followed yours. However, I do wish to amend some points that he made.

However, short-selling carries the risk of a short-squeeze

This is absolutely true for stocks.

However, UVXY is NOT a stock; it is an ETF with a theoretical unlimited supply of units. Unless ProShares stops supporting the ETF as CS stopped issuing new notes to back TVIX a year ago, a true short squeeze is inconceivable.

For this reason, short sellers are advised to use a kind of "fractional reserve" system. You should only risk, let's say, one-fifth of your total portfolio, so you can be prepared for any spike.*

In essence, Eric is saying, manage risk, be it with excess capital, counter-positions, or options! I agree 100%


In response to SVXY, he is alluding to the beta decay faced by all inverse and leveraged ETPs. I have written on this subject many times on this board. Scan through all of my posts here since April 23 and you will find ample explanation!!!

Finally, I have reviewed your profile and your interests which seen to lie in technical trading.

UVXY is a derivative to the 7th power. Technical analysis really doesn't work here. Volume is moot as UVXY moves in tandem with its intrinsic value ^UVXY-IV which is a complex mathematical formula based on the proximal two months VIX futures.

All in my humble opinion, of course.


Happy huntin!


Doc


PS: Still going long with SVXY either with equity or ITM calls with long expiry is a winning play.

Furthermore, selling covered calls with SVXY or entering spreads with options is a great play, imo, because there is mucho delta built into the calls ATM and just OTM.