WOW, Proshares reducing leverage on two volatility funds

JSOP said:
You are right. Changing of the dividend rate of a dividend, just like changing of leverage rate is NOT a corporate action so NO OCC adjustments is required. Options were priced correctly according to the change in leverage rate.

I am glad you convinced yourself on this one.
More...

If the prospectus of an ETF at the start of trading says it's a 2:1 leverage... than that's pretty much a fixed given. Changing that changes the entire product.

If a company pays out 1% dividend (which is determined by the shareholders meetings, not stated in any prospectus) and then changes it to 2% or whatever... due to normal business circumstances... that's what it is... normal business. If they decide to payout 10% because of excessive cash... that's not normal business, so the options specs are changed.

If Velocity decides to change the leverage, which was set in the prospectus (as far as I know)... that's not a normal business practice.

I am glad you've convinced yourself that changing the underlying calculation set within the prospectus is the same as changing a dividend. Good on you, I hope you'll not get yourself caught up in a corporate action one day because of this in-grown believe.
 
newwurldmn said:
Still the arbitrage between the cash and the synthetic isn’t violated.
More...

That's true, but the economic value of the options are changed overnight due to non-standard business practice. But hey, maybe it was in the prospectus and in that case it could've been foreseen... I don't know...
 
JackRab said:
That's true, but the economic value of the options are changed overnight due to non-standard business practice. But hey, maybe it was in the prospectus and in that case it could've been foreseen... I don't know...
More...

I would think the prospectus would be open ended enough to allow them to change the investment strategy of the etf.

The only change is that the implied volatility should get cut substantially. That’s no different than a company engaged in a cash takeover and the volatile go to single digits before the deal is done.
 
newwurldmn said:
I would think the prospectus would be open ended enough to allow them to change the investment strategy of the etf.

The only change is that the implied volatility should get cut substantially. That’s no different than a company engaged in a cash takeover and the volatile go to single digits before the deal is done.
More...

Yeah, but a takeover is within normal business practices... that's a risk that is inherent in the markets.

That said though... I do think it's weird that on cash takeovers the options are basically settled at intrinsic... or so it seems to me. I'm used to the European markets where they settle on pre-bid IV. So long dated options are not worth 0 or intrinsic value, but still have time value which is all settled at time of takeover completion.

Of course you lose theta over time, depending on how long it all takes.... but again, that's normally expected.

Anyway... what do you do... the risk with this ETF change/uncertainty is that people might get wary of trading options in them. What if they decide to double it again tomorrow?
 
JackRab said:
Yeah, but a takeover is within normal business practices... that's a risk that is inherent in the markets.

That said though... I do think it's weird that on cash takeovers the options are basically settled at intrinsic... or so it seems to me. I'm used to the European markets where they settle on pre-bid IV. So long dated options are not worth 0 or intrinsic value, but still have time value which is all settled at time of takeover completion.

Of course you lose theta over time, depending on how long it all takes.... but again, that's normally expected.

Anyway... what do you do... the risk with this ETF change/uncertainty is that people might get wary of trading options in them. What if they decide to double it again tomorrow?
More...

Perhaps that’s where our difference of opinion rests.

I (and the OCC in the US) look at the deliverable being consistent with the underlying. Europe (and you) want to see something more fair volatility wise.
 
JackRab said:
If the prospectus of an ETF at the start of trading says it's a 2:1 leverage... than that's pretty much a fixed given. Changing that changes the entire product.

If a company pays out 1% dividend (which is determined by the shareholders meetings, not stated in any prospectus) and then changes it to 2% or whatever... due to normal business circumstances... that's what it is... normal business. If they decide to payout 10% because of excessive cash... that's not normal business, so the options specs are changed.

If Velocity decides to change the leverage, which was set in the prospectus (as far as I know)... that's not a normal business practice.

I am glad you've convinced yourself that changing the underlying calculation set within the prospectus is the same as changing a dividend. Good on you, I hope you'll not get yourself caught up in a corporate action one day because of this in-grown believe.
More...

Anything that's a characteristic of a security could be potentially changed throughout the life of a security, whether it's set in a prospectus or not. And with any changes, market would price the security differently which would in turn affect the price of any derivatives based on that security. Get over it, it's NOT corporate action.
 
JSOP said:
Anything that's a characteristic of a security could be potentially changed throughout the life of a security, whether it's set in a prospectus or not. And with any changes, market would price the security differently which would in turn affect the price of any derivatives based on that security. Get over it, it's NOT corporate action.
More...

You seem frustrated
 
JSOP said:
Yes frustrated that now those options are cheaper for me to buy on a permanent basis. LOL
More...

Well they are "cheaper" on their face only, right? If their leveraged is reduced, this reduces their price per option, but you'd need more options to get the same overall upside, and it should (generally) wash, correct?
 
Saltynuts said:
Well they are "cheaper" on their face only, right? If their leveraged is reduced, this reduces their price per option, but you'd need more options to get the same overall upside, and it should (generally) wash, correct?
More...

If you buy them for speculation only yes
 
You must log in or register to reply here.
Back
Top