VIX-Leveraged ETPs And The 5% Contango Rule

On April 23, 2017 I informed readers, traders and investors alike as to the risks that lay before the global equity markets in an article titled Macro-Concerns Dominate The Trading Week As Volatility Takes Center Stage. Within the article I also articulated my steadfastness regarding maintaining a long-term, core short position in ProShares Ultra VIX Short-Term Futures ETF (UVXY) that I had been increasing, as the VIX had been rising. 

For all the media’s fear mongering and traders hedging their proverbial bets against their long positions and just as was the case with Brexit, global equities rallied past the headline risks as the VIX precipitously dropped. On this latest French election, North Korean and looming government shutdown scare, the VIX rose beyond 16 before settling at 14.63 on Friday April 21, 2017. If you held onto your long VIX and/or VIX-leveraged ETF/ETN positions for fear of the French election, Monday morning those positions were significantly damaged. The VIX dropped all the way down to 10.84 on Monday, cratering VIX-leveraged instruments like UVXY, my favorite of all the VIX-leveraged ETFs. And it wasn’t even like UVXY gave longs/hedgers a chance to get out of it with minimal damage that day as it trended lower throughout the day, closing near the lows of the trading day. It’s for this and many other market exampled reasons I always offer to investors/traders not to go long designated short instruments. If your timing is not precisely perfect on the entry and the exit, the capital erosion can be demoralizing. But it’s a great lesson for a great many market participants to say the least.

Staying short leading up to and through this past week’s manufactured drama in the markets proved quite rewarding for the Golden Capital Portfolio.  While I suffered through the significant 45% backwardation in the portfolio’s largest position in UVXY (Short shares); I understood this backwardation would be met with equal or greater share price decay in the near-term. And it is with that understanding that I continued to short through backwardation, layering in more and more positions as well as trading intraday. UVXY experienced a 45% share price spike from the low $15s to roughly $21.75 in a matter of 2-weeks.  In less than 3 trading sessions, the share price dropped all the way back down to the low $15 range.  This past trading week, UVXY found a new, all-time trading low and finished the trading week at $14.18 a share. Golden Capital Portfolio, as chronicled here on TalkMarkets.com and with various articles, maintains a long-term, core short UVXY position. It’s for this reason that the portfolio is now expressing a 67.5% ROIC year-to-date. The screen shot below of Golden Capital Portfolio performance YTD identifies the portfolio’s mirroring of UVXY’s backwardation, portfolio manager’s layering of additional short positions during backwardation and subsequent drop in UVXY share price. 

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Disclosure: I am short VXX and UVXY, I am long COST

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Comments

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Volnote 2 years ago Member's comment

Any opinion on what you feel is the best broker to hold short UVXY?

Seth Golden 2 years ago Author's comment

In my experience, as I have used a plethora of brokerages/platforms since 2001, Scottrade is the only one that has never called in shares on mine or associates' accounts.

Volnote 2 years ago Member's comment

Thanks, appreciate the reply.

Bill Bishop 2 years ago Member's comment

I have to assume a strategy like this performed well even in 2015, a year in which it has been said that EVERY volatility product declined in price, with UVXY down about 77% that year. I don't think we will see a year in which they all go up!

Seth Golden 2 years ago Author's comment

Would be very challenging to exhibit all like instruments having an annual gain, but should that be that case, it is always prudent to have ample cash to participate accordingly.

Bill Bishop 2 years ago Member's comment

Okay but the phrase "like instruments" may be confusing to some. I wanted to be clear that even instruments appearing to be opposites, or at least on opposite sides such as $VXX and $XIV, $UVXY and $SVXY, $ZIV and $VXZ etc. all declined in 2015.

Vibrant Cosmos 2 years ago Member's comment

Excellent post. Specifies guidelines to any one new or pro. Will use this as a ready reckoner before opening new positions in VIX ETP/N. Any guidelines when in negative contango? What levels one should look for trim positions? what level to book losses?

Seth Golden 2 years ago Author's comment

Thank you! This article www.talkmarkets.com/.../uvxy-reverse-split-ahead-how-to-position-when-volatility-spikes offers my positioning when $UVXY or $VXX spike, usually during negative contango.