UVXY features and shorting VIX

[movingslow]

I haven't done any volatility trading at all, so I'm going to ask a few (probably) stupid questions:

UVXY is the Proshares short-term VIX ETF, which is very liquid. If you look at the price performance since inception, you can see that it very consistently declines in price. True, there are a few occasions when its price doubles or even triples (when VIX spikes), but in the long run, this ETF is basically designed to go down in price.

First, is there something that prevents you from shorting this ETF? I think there was a simple explanation. but I don't recall it immediately. I don't mean be short risking all your capital, but even a tiny part of a portfolio short UVXY should give you a relatively steady source of return each year, no? This seems like an automatic money making machine, so please tell me what I am missing here.

Second, there is an ETF which is almost the inverse of the aforementioned, namely, SVXY, which should give you the effect of shorting VIX without actually short selling any instrument. However, if you look at SVXY price graph, there is a very large drop in January 2018 when the market crashed. Can you explain why this happened with SVXY, but UVXY did not get as big of an upside? What is different here compared to just short selling UVXY?

Thanks!

 

[Damanuelman]

Oh yeah so first there's VXX which is a volatility ETF that follows the VIX index or fear index by selling the front month and buying the back month contracts on the VIX futures curve. Volatility is usually in contango which means that the Front month is cheaper then the back month contract on an upward slope. Since the back months are more expensive VXX actually costs money to keep a position open therefore lowering it's value everyday as a decaying product unless there is a volatility increase. It's not meant for long term hodling, just for speculation on VIX in a simple ETF format. UVXY is like VXX but double, therefore UVXY value decays at a faster rate with spikes in price that never live up to the previous prices, so it looks like a good deal right? Just sell short for the long term and with the law of large numbers and the contango nature of VIX you should be fine right?

Right?.........

Then came "inverse volatility ETF's and ETN which is all just marketing bs anyways, called SVXY and XIV. SVXY and XIV are ETF and ETN that are not meant to be held as long term investments. XIV had a liquidation threshold of losing 80% in a day and they had an "acceleration event" which means that they would just pay you the price before they stopped trading XIV at whatever the price was on the acceleration date. SVXY was changed to tracking half of what it use to due to well the spike in VIX. S&P 500 dropped around 5% and VIX more then doubled causing the liquidation of XIV and SVXY lost 99% of there value. Prior to this the VIX was just going lower and lower and XIV and SVXY became so profitable making investors blind to the risk, who cares about risk when all you are doing is making money, can someone show me the risk? They even call it a "black swan", it was just the market slaughtering pigs.

If I seem bias in this I am, I know that the margin requirements are higher then they use to be on UVXY at IB since I last checked and shares are usually Hard to Borrow since there's plenty of people already shorting it as you saw by the collapse of price in SVXY. A couple of years back before the collapse of SVXY I threw a couple thousand at SVXY Long Dated Options as a Spread, I thought I found a gold mine because all SVXY ever did was go up. Even it's just a small sum of your net worth,take the risk and see what's it like with something that can't hurt you or you'll be fine if things go south or up in this case ha. And you're right as long as volatility stays low and keeps decreasing without a spike then SVXY is profitable over time.

UVXY went from $50 to around $110 which is more then 100% increase you don't see a direct 200% increase from the VIX spike due UVXY Selling front month and buying back month contracts like stated above and of course the increase in the VIX goes to higher VIX futures contracts prices anyways so yeah...

TLDR: Just remember there's no such thing as a free lunch or as you call it a money making machine other then those at the Federal Reserve and of course I wish you the best as a budding Vol trader.

 

[lindq]

First, is there something that prevents you from shorting this ETF?

Yes, what should prevent you from shorting the VIX ETPs is...sanity.

There are a few trading instruments that can clean your account, and in some instances your net worth, and these are a few of them.

There are better ways to trade volatility.

Good luck.

 

[movingslow]

Thanks, this already answered many of my questions.

The first reply got me thinking, can a small investor (less than one million capital) construct the inverse of UVXY (or VXX) position by just dealing with futures contracts directly (take a short position in the VIX future and roll it forward, as the ETF does, but taking the opposite side, i.e. you regularly buy back the front month and open new shorts in the next month)?

Ok, so if the above with VIX futures is possible to do, then that would be a "free lunch" until...what happens? The VIX curve inverts drastically? But can it ever do a huge inversion (one that would bankrupt you), as once the near term volatility goes up, the next month at least won't stay where it is (or decline), it has to go up as well. Unless we live in bizarro world where the near term becomes dramatically more uncertain than the more distant future.

Believe me, I am very skeptical about free lunches, but I also want to find an explanation for why something doesn't work the way it seems to the simple or untrained mind

 

[guru]

Thanks, this already answered many of my questions.

The first reply got me thinking, can a small investor (less than one million capital) construct the inverse of UVXY (or VXX) position by just dealing with futures contracts directly (take a short position in the VIX future and roll it forward, as the ETF does, but taking the opposite side, i.e. you regularly buy back the front month and open new shorts in the next month)?

Ok, so if the above with VIX futures is possible to do, then that would be a "free lunch" until...what happens? The VIX curve inverts drastically? But can it ever do a huge inversion (one that would bankrupt you), as once the near term volatility goes up, the next month at least won't stay where it is (or decline), it has to go up as well. Unless we live in bizarro world where the near term becomes dramatically more uncertain than the more distant future.

Believe me, I am very skeptical about free lunches, but I also want to find an explanation for why something doesn't work the way it seems to the simple or untrained mind

There are variety of volatility ETFs/ETNs that use various futures and automatically roll to make it easier for everyone.
But to really understand the risks you may want to start with reading about what happened in Feb 2018:
https://www.google.com/search?q=volatility+fund+blows+up+2018

 

[guru]

And just a few days someone posted a podcast about this trader that lost $25M during that vol blowup:
https://www.elitetrader.com/et/thre...bout-losing-25m-feb-2018.339118/#post-4987940

 

[movingslow]

There are variety of volatility ETFs/ETNs that use various futures and automatically roll to make it easier for everyone.
But to really understand the risks you may want to start with reading about what happened in Feb 2018:
https://www.google.com/search?q=volatility+fund+blows+up+2018

I think the ETFs/ETNs might actually be the dangerous vehicles, not so much the VIX futures contracts? In the February 2018 VIX spike episode (that destroyed the SVXY), VIX spiked slightly over 100% in one day. I can see how a fund can collapse on this, but a trader short the actual VIX future would have survived, no? Especially if the position was only a small part of the portfolio. Within a few days, VIX was back to "normal" levels. I assume you would have been able to maintain the short position and been able to ride out the storm, whereas a fund could not do that.

Again, I might be missing something due to no experience in the VIX futures contracts, so please point out mistakes in my thinking if you find some.

 

[guru]

I think the ETFs/ETNs might actually be the dangerous vehicles, not so much the VIX futures contracts? In the February 2018 VIX spike episode (that destroyed the SVXY), VIX spiked slightly over 100% in one day. I can see how a fund can collapse on this, but a trader short the actual VIX future would have survived, no? Especially if the position was only a small part of the portfolio. Within a few days, VIX was back to "normal" levels.

Again, I might be missing something due to no experience in the VIX futures contracts, so please point out mistakes in my thinking if you find some.

I short volatility quite often and even run an automated TVIX trading strategy (long/short), so I am with you in terms of profit potential and limiting risk via position sizing. I dabble in VIX futures as well but not seriously until I’ll have time to backtest related strategies and ideas. I do have amazing strategies for trading VIX index itself (cash), if it could be traded itself, but it cannot. I do plan to backtest futures in the future.
Every strategy needs to be backtested, so that would be my advice: backtest it, whether by writing some code or manually in Excel or ToS, and/or at least trade with small sizing and limited risk like you mentioned.

 

[movingslow]

I short volatility quite often and even run an automated TVIX trading strategy (long/short), so I am with you in terms of profit potential and limiting risk via position sizing. I dabble in VIX futures as well but not seriously until I’ll have time to backtest related strategies and ideas. I do have amazing strategies for trading VIX index itself (cash), if it could be traded itself, but it cannot. I do plan to backtest futures in the future.
Every strategy needs to be backtested, so that would be my advice: backtest it, whether by writing some code or manually in Excel or ToS, and/or at least trade with small sizing and limited risk like you mentioned.

Thanks for your reply. Are VIX futures easily available for a small investor to trade? E.g. is it possible to have only tiny exposure on the VIX, let's say around $10k, so that if VIX spikes 100%, you lose $10k if you close the position immediately?

 

[guru]

Thanks for your reply. Are VIX futures easily available for a small investor to trade? E.g. is it possible to have only tiny exposure on the VIX, let's say around $10k, so that if VIX spikes 100%, you lose $10k if you close the position immediately?

Not sure whether I understand, but you can trade futures spreads worth only $500, for example. Though you could lose more than that. And you can multiply that risk.
They’re pretty liquid, but sometimes there may not be enough time to exit quickly enough with minimal loss. At least there isn’t much slippage, but this also depends on which months or weeks you trade. So really any such answers will be wishy-washy and I just test whatever I want to trade myself, even live, checking the cost of the spread, margin and bid/ask.