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UVXY: The Odds Still Favor Shorting Volatility

QuandaryFX profile picture


  • The VIX is highly mean reverting and since we are at elevated levels, the odds favor further downside.
  • VIX futures structure is currently suggesting that we are going to see further downside in the VIX.
  • Roll yield continues to take a toll on the strategy which UVXY follows – I am short UVXY to capture the long-term returns associated with the roll.

Over the past few weeks, shares of the ProShares Ultra VIX Short-Term Futures ETF (BATS:UVXY) have slipped on the back of a decrease in the level of the VIX as seen in the following chart.

As we’ll discuss in this article, I believe that UVXY is headed lower. Specifically, I believe that the forces of negative roll yield as well as the mean-reverting nature of the VIX are indicating further downside in UVXY over both the short- and long-term future.

Understanding Volatility

Prior to ever trading the VIX or any VIX-linked ETPs like UVXY, it makes a lot of sense to take a step back and actually understand the mathematics around VIX movements. The reason why it is critical to do this step is that through understanding, we can better be equipped to call future directions in volatility and position accordingly.

As I’ve said before when discussing UVXY, the key thing to keep in mind is that the VIX is mean reverting. That is, when it goes up over a certain time period, it tends to fall in the future. This chart is generally my departure point for understanding what is the most likely move for the outright VIX over the next month.

If you reference the first chart of this article, you can see that the VIX is currently sitting at around 32. This number isn’t shown on the chart above, but the relationship of declining odds of upside continues into the future. Put simply, given that the VIX is sitting at 32, the last 27 years of market data would say that there’s only about a 30% chance that the VIX will rally over the next month. In other words, a short trade in the VIX itself has about a 70% chance of making money over the next month.

This article was written by

QuandaryFX profile picture
I work within the trading and money management industry. I have been trading and investing for several years. My style is technical execution with a fundamental thesis in place. I rely heavily on statistical analysis of the correlations between fundamental changes and price movements for generating most ideas.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (10)

Very well-reasoned and argued. But, we are about to see a huge volatility spike as hopes and dreams meet the realities of science.
Symphox1 profile picture
Your first sentence assumes that mean reverting fear is a thing in this environment.

It’s not.
Wouldn’t it make more sense to short TVIX then?
jerryki profile picture
If you look at UVXY and VXX together on the same scale, UVXY doesn't have that much more amplitude than VXX. But VXX options are way more liquid (like by a factor of 10 or 100) with narrower spreads, etc. So I have all my long-term put spreads with VXX and none with UVXY. If it goes my way, I'm very happy with the return from VXX rather than a little better with UVXY and that's before considering the liquidity/bid-ask spreads.
What relevance does "market history" have to the current environment? We have never had a president who is as unbalanced and lacking any scruples as this one is. We are being "governed" by inane tweet after inane tweet. There are no lengths he will not revert to in order to
avoid defeat in November, and possibly beyond! As of today that means sacrificing lives on the altars of his vanity and ignorance. I am in the camp of those who are predicting economic meltdown for the rest of the year at least.
sliman21 profile picture
"We have never had a president who is as unbalanced and lacking any scruples as this one" You can say the same thing about Obama, Clinton, Truman, Johnson, Nixon Kennady at points in their presidency. Keep shorting the market rody
OK I will bite.Give me examples of conduct on the part of those you mention which is remotely comparable to that of the unhinged disaster we are currently burdened with. You can start with advice to citizens to inject themselves with disinfectant and then why not compare conduct during national disasters- damned if I can recall any one of them using an address to the nation to boast about his alleged popularity etc.etc.
Augustus profile picture
Ignorance is such a charming quality to display on an investment message board.

How closely related are you to James Comey? Or maybe you are Obama's imaginary son?
atn1972 profile picture
Isn't the VIX future curve still in backwardation? The front month is still higher then the next month, so it has a positive roll yield.
swilner profile picture
As of this evening (6 May), the curve is flat. If we start to get more market days with +/- 75 basis point moves in the market (rather than the 200, 300, 400 point moves from a few weeks ago), we will see a return to contango.
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