UVXY: Pre-Split Caution Being Raised

If you have been following my coverage and analytics concerning volatility, VIX and VIX-leveraged ETFs you’ve probably done well for yourself in 2016.  My greatest VIX-leveraged publications focus on ProShares Ultra VIX Short-Term Futures ETF (UVXY). The 2X leverage and long-term decay of the instrument provides for greater comfort when dedicating capital investment.  UVXThe decay is so constant that for each year the instrument has traded, there has been a correlated reverse split.  UVXY's most recent and 6th reverse split took place on July 25, 2016. This was a 1 for 5 reverse split, meaning for each 5 shares of UVXY owned pre-split, the shareholder now owned 1 share. 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.

One of the main reasons a reverse split would take or need to take place for the Proshares Company is that prices are too low for UVXY and other ETF shares. When the share price drops below $10 a share, certain mutual funds are not permitted to participate based on the governance of the mutual fund.  Some mutual funds have lower price limit at $5 a share. Nonetheless, Proshares benefits through greater participation from mutual funds with its products and as such manages its products to evoke greater participation, thus reverse splitting the price of UVXY and other ETFs/ETNs when needed.

VIX and VIX-leveraged instruments are designed/constructed short instruments. Yes, I offer this context often, but only because I recognize the faulty volume still participating from long participation. It is within this context and against the backdrop of another forecasted reverse split in shares of UVXY I offer the following consideration, an equation if you will: 

UVXY Shares at $12.50 X 1,000 shares long = $12,500.  Now, $12,500-40% = loss of $5,000. Take reverse split of 5:1 from $7 a share to $35 a share: Your 1,000 shares split become 200 shares. $35 X 40% gain X 200 shares = $2,800 gain. You still have another $2,700 to make up from original loss and pre-split.

See the problem holding long losses through a reverse split? A 40% loss pre-split does not equate to the same dollar value gain post a reverse split even with the same percentage move working in favor of the long position. It’s one of the reasons why I often suggest to long participants with UVXY that they need to consider having additional capital for trading/investing in UVXY post a reverse split, to possibly increase position and bridge the percentage-move-gap created by the reverse split. This would be true dollar-cost-averaging with such an instrument.

The equation noted is a caution/warning for longs, at least.  Having said that, post a reverse split in shares of UVXY is the benefit of reduced contango. Contango being the beast of burden it proves to be for long VIX-leveraged ETF participants, this is very much welcomed.  Additionally, with a higher price per share comes greater beta in these instruments and large percentage moves, however, that “knife” can also “cut both ways as they say”.





Disclosure: I am short UVXY/TVIX.

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