On June 18th, I authored an article titled "UVXY Strategy For Brexit". The article aimed to explain not only the long-term directional trading pattern for ProShares Ultra VIX Short-Term Futures ETF (NYSEARCA:UVXY), but how to best position oneself with the ETF and identify Brexit as a fundamental backdrop. The UVXY ETF benefits traders and investors in that the share price will always seek out new trading lows over time. In my 2-Part Series that focuses on UVXY, traders and investors are offered an explanation as to the overall construct of the UVXY and why its construct forces new trading lows in perpetuity. Additionally, this series offers investors a perspective on dividend investing vs. UVXY investing. Positioned as an Instablog, this series of articles has garnered some of the greatest number of page views/clicks of any Instablog I've offered. For those readers and investors newly introduced to the UVXY, it might prove relevant to read the 2-Part Series linked below.
With a better understanding of the UVXY, I would now like to offer the potential opportunity at-hand and should the volatility presented by Brexit persist in the coming trading weeks. In an environment that expressed a global equity sell-off on June 24th, I'm not panicking as I've prepared for such an event by presciently raising cash in previous weeks. My previously outlined J.C. Penney (NYSE:JCP) and Twitter (NYSE:TWTR) trades both captured the profits I desired and allowed me to raise cash. And as noted in "UVXY Strategy for Brexit", I had peeled out of some of my UVXY shorts already at $11.50 and $13.50. My cash on-hand going into the June 24th market sell-off was 68% of my total investing capital. So when I speak in terms of potential and participating with UVXY, it should be noted that cash on-hand is a key variable for maximizing the potential opportunity that comes when the ETF appreciates for short periods of time. Let's start identifying the potential with a look at the following chart of UVXY.
I would invite investors/traders to take a look at the huge spike in the UVXY trading price that occurred from August 18th and lasted until September 1, 2015. The share price appreciation began at roughly $26 a share and peaked at roughly $91 a share. With the market in a tailspin and volatility spiking over this period, another short opportunity was presented for UVXY-savvy investors/traders who understood that indeed this was an opportunity and not something to fear.
Client: "But Seth, the ETF is up more than 100% in a week".
Seth: "The opportunity will only improve the higher the price goes and with more shorting…layer in as it goes higher but in keeping with appropriate levels of liquidity so as not to be called-in".
The UVXY is closely tied to twice the daily return of the S&P VIX (VIX i.e. volatility) Short-Term Futures. During periods of greater volatility it lends itself to short-term price appreciation followed by long-term price depreciation. Investors/traders are invited to better understand the key term "volatility" and how it defines the price action of UVXY. The physics of the term "volatility" define its longevity, as volatility is a quantifiable term and not a qualitative term. In short, volatility can only persist for so long and before it exhausts itself to levels of complacency, which are far more frequent and with greater longevity. As such, the UVXY deteriorates in price during periods of less volatility or increased complacency. With the UVXY being double levered, the deterioration is exacerbated or magnified if you will.
With the aforementioned UVXY price spike example, what was not known is how high the price would go or for exactly how long it would rise. As such, a long position in the instrument would require exemplary timing to maximize the potential trade. Add to that the understanding that the price will fall longer-term and we come to better appreciate the greater risk introduced to participating with UVXY comes from the long side and with a higher level of discomfort. It's for this reason, that I always maintain a short position in shares of UVXY and only participate on the long side during times of " extended" complacency in the market. Furthermore, within this first exampled UVXY opportunity one can identify how briefly the share price appreciates before falling in price for a more extended period of time. Now let's take a look at another short opportunity that could have been beneficial for investors/traders via UVXY earlier this year.
The 6-month UVXY chart above identifies yet another short opportunity for investors/traders that existed back in the February-March period when China was supposed to unravel alongside Japan's Central Bank taking action to mitigate the impact on its currency. From January 6thto February 11, 2016, shares of UVXY rose by more than 95% before peaking. As with every appreciation in the UVXY share price, it is always met with a more steep and protracted share price depreciation thanks, in part, to contango. And since February 11th, shares of UVXY have found a new, all-time trading low (split adjusted) of $9.35 a share. With a new, all time trading low being achieved recently let's now take a look at the MAX-Chart for UVXY as it came to the marketplace in 2011.
The UVXY ETF moves in one direction long-term and one direction only as identified in the chart. Whether the market was up or down on the year, the UVXY has still sought new lows. This is not to suggest that one can't benefit from a long position during periods of great volatility, but it requires greater timing and an acceptance of greater risk. As such, I'm not advocating against going long UVXY as some authors are advising to take that position, but rather identifying the better option with lower risk and greater long-term profitability. It should be understood that UVXY is not a hedge against the overall market or S&P 500 Index but rather a hedge against increased levels of volatility.
In recent weeks, a couple of well-written articles have offered taking the long-side of the UVXY equation with the instrument at its recent $16.50 peak price during that time period. During that same 10-day period the stock fell all the way to $9.35 and has only now recovered to $14.99 in the face of a 600+ point drop on the Dow Jones Industrial Average. Timing is so very crucial when taking a long position in UVXY as identified by the latest price swings. With the share price appreciating some 44% on June 24th, and with half of that gain occurring before the market opened for trading, another well-written article outlined a favorable long sentiment for UVXY. The only issue I took with "Brexit: What You Need To Do Now" is that it invited investors/traders to utilize the instrument as a hedge without recognizing the risks associated with it. Additionally, the invited risk was with increasing one's exposure to the overall market as opposed to a strategy of raising capital in advance of market volatility. It is more of a reactionary approach than proactive approach that inherently increases the risk on capital. Even so, the timing may be just right if the UVXY trends higher in the coming weeks.
The opportunity lay within UVXY to generate great wealth for investors/traders more so from shorting the ETF long-term. If volatility persists in the coming trading sessions, which is quite possible, I will be looking to layer short positions into a UVXY bull rally. I had maintained a $15.80 short limit order on June 24ththat did not execute and as such I actioned an after-hours limit order at $15.70 that did execute. I often utilize my Twitter feed to display my positions in real-time.
$UVXY order filled AH @$15.70 a share. Will look to build at higher prices.
Next week will mark not only the first, full post Brexit trading week, but it will also mark the end of the quarter. The potential for volatility to remain in the market near-term is higher given these two variables. As such, I will continue to look for opportunities to layer more shorts should UVXY increase accordingly. With plenty of cash on-hand, picking and choosing where to add short positions is of my only concern regarding this action plan.
Disclosure: I am/we are short UVXY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.