My Plans For Success In 2017 Continue To Involve VIX-Leveraged ETFs/ETNs

In 2016, the Golden Capital Portfolio managed to achieve a 167% return on capital invested. Capital allocation was largely positioned with equities throughout the year as it had been in previous years with the exception occurring in 2010. In 2010, Golden Capital Portfolio invested in three real estate developments with each investment garnering 65% or greater returns by 2014 and after selling all properties maintained in the portfolio. As the self-managed portfolio enters 2017, my plan for outsized gains remains as it was in 2016, heavily aligned with capital allocation designated to VIX-leveraged ETFs/ETNs.

In the 1st quarter of 2016, I informed my followers and readers of my plans for generating outsized capital returns in an article titled “UVXY: My Plan For Success In 2016”.  My preference to short VIX-leveraged ETFs/ETNs is due to the nature of these instruments, per design, to decay in price over time. And my preferred instrument to short is ProShares Ultra VIX Short-Term Futures ETF (UVXY). The VIX, or fear indicator/measure of volatility and VIX-leveraged instruments are short instruments and were never designed to facilitate a long position. The chart of UVXY below demonstrates the unfailing nature of these instruments to decay in price over time.  

(Click on image to enlarge)

Episodic spikes in UVXY and the VIX occur; they can be quite volatile when they occur as well. When this volatility takes place, UVXY and like ETFs can spike in price by great percentage points, even doubling in price in relatively short periods of time. It’s these spikes and percentage moves that serve to erroneously lure long participation. Unfortunately, timing such episodic spikes is extremely difficult from both an entry and exit position. Most recently the VIX rose from the low 11 range to just over 14. That’s a pretty big move and while shares of UVXY rose from roughly $7.50 to almost $9 a share. The problem with the appreciation in shares of UVXY is not where the rise started but where it ended. Coming into Monday’s New Year 2017 trading session and in the pre-market with futures soaring, shares of UVXY plunged below $8 and wiped out most all of the recent share price appreciation before longs could get out with a reasonable profit. It’s not fun or funny to watch traders trade and lose capital from the long side of UVXY or like instruments. This is especially true being a prominent educator on the fundamentals of VIX and VIX-leveraged trading instruments. The more fruitful way to participate in these examples spikes in volatility is to short the spikes, which requires little to no timing for entry or exit positions. Essentially no matter where you enter a short position provided one can maintain liquidity, a profit will be found due to the nature of the VIX and VIX-leveraged ETFs/ETNs. 

The UVXY chart depicted from 2016 demonstrates the aforementioned spikes that occurred in the 1st quarter of the year with a precipitous decline post the Q1 period and to date. In the Golden Capital Portfolio, I invested heavily into UVXY short shares during Q1 and proceeded to cover positions in subsequent quarters. Profits from shorting the large spikes were in excess of 90% with substantial opportunities to reposition new short positions throughout the year, which served to compound returns. Another major opportunity to short the spike in shares of UVXY came via Brexit for which I authored an article explaining to traders the most beneficial way to participate in a likely volatile breakdown of markets. The article title “UVXY Strategy For Brexitoffered to traders the opportunity to short shares of UVXY and volatility during the Brexit fallout. The plan worked perfectly and those who did short UVXY through Brexit found extreme capital returns. 

In 2017, my plans for Golden Capital Portfolio remain as they were in years past and through utilizing UVXY for greater capital gains.  While my strategy may be altered throughout the year regarding profit taking and the maintaining of a core UVXY position, shorting the spikes will continue.

As we begin trading for 2017, ProShares has announced and as previously forewarned those who were long VIX-leveraged ETFs/ETNs, another reverse split. In my recent UVXY/VIX-dedicated publication titled “UVXY: Pre-Split Caution Being Raised” I warned long participants about the possibility of a reverse split near-term and the repercussions from such an occurrence. 

With shares of UVXY trading at all-time lows and below $8 a share presently, Proshares Ultra VIX Short-Term Futures ETF will be considering yet another reverse split near-term and barring any unforeseen headwinds.

On December 22, 2016, ProShares announced splits/reverse splits on 13-levered ETFs.  The bad news for longs when carrying losses through a reverse split is the greater move required to get back to even comes from holding fewer shares. This is yet another reason suggesting against initiating long positions on UVXY or TVIX, unless you are a glutton for capital losses. 

Disclosure: I am short UVXY and TVIX

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Jim Bradley 6 years ago Member's comment

Thank you for this article. Great “process”, plan and realized outcome!

MJ Tuen 7 years ago Member's comment

Thanks for the insights. The problem is there is always hard to borrow shares to short. How do you manage to get those shares.

Seth Golden 7 years ago Contributor's comment

I use two trading platforms whereby in the case that one has low inventory the other has available. But in general and as I have written into many publications, Scottrade has the most inventory to borrow short. Also, maintaining a core short position for extended period of time incentivized broker/dealer to maintain shares to borrow. So if shares are hard to borrow for a trader it is generally the platform being used or the way one manages a short position.

Ron Meadows 7 years ago Member's comment

So true and relevant....

Seth Golden 7 years ago Contributor's comment

Thank you for reading and I hope traders use these instruments to their advantage.