The S&P 500 VIX Short-Term Futures Index tracks the performance of a monthly VIX futures portfolio that rolls positions from first to second month contracts on a daily basis. The index maintains a one-month weighted average until expiration.
On the expiration dates of VIX futures contracts, the market’s view of the value of the Cboe Volatility Index (VIX) is priced. The VIX index calculates the predicted volatility of the S&P 500 over the next 30 days based on the price of a continually changing portfolio of S&P 500 options. The VIX is not a market index that can be directly invested in.
Unlike other asset classes, which have tended to rise in value over time, the VIX has tended to revert to a long-term average. If a result, any gains from VIX futures contracts may be limited, and surprise reversals may occur as the VIX reverts to its long-term average. The considerable costs associated with rolling VIX futures contracts on a daily basis have historically been represented in VIX futures indices. These expenses have the potential to erode returns over time. Futures indexes like the VIX can be extremely volatile.
What is the definition of a short-term futures index?
The S&P 500 VIX Short-Term Futures Index replicates a position that rolls the nearest month VIX futures to the next month on a daily basis in equal fractional amounts by using the prices of the next two near-term VIX futures contracts.
What exactly is the distinction between VIX and Vixy?
VIXY is a commodities pool ETP that provides exposure to short-term VIX futures, which distinguishes it from other short-term VIX ETPs that cover the volatility space as ETNs.
What exactly is the distinction between VIX and UVXY?
VXX (ETN) and UVXY (ETF) are both exchange-traded funds that track the daily percent return of a portfolio of two front-month VIX futures contracts. UVXY differs from VXX in that it is two times leveraged. This indicates that on any given day, UVXY will return twice the percentage of VXX.
What is proshare Ultra all about?
The Ultra S&P 500 is another well-known ProShares fund (SSO). This fund, one of ProShares’ inaugural offerings, aims to double the returns of the S&P 500 Index in a single day, as assessed by consecutive NAV computations. The ProShares Ultra Short S&P 500 (SPXU) is a leveraged ETF that seeks to outperform the S&P 500 Index by three times its daily performance.
Is it time to buy when the VIX is high?
“If the VIX is high, buy” indicates that market participants are overly negative and implied volatility has reached its limit. This indicates that the market will most likely turn bullish, with implied volatility returning to the mean. The greatest option strategy is to be delta positive and vega negative, which means that short puts are the best alternative. Positive delta just means that if stock prices climb, so does the option price, and negative delta simply means that a position gains from lowering implied volatility.
Are VIXY shares subject to expiration?
ProShares VIX Short-Term Futures ETF is a good option for short-term traders (VIXY). The S&P 500 VIX Short-Term Futures Index is tracked by this short-term futures ETF. The fund’s futures contracts are set to expire in one month. This index tracks the performance of a monthly VIX futures portfolio.
What’s the difference between an ETN and an ETF?
ETNs are structured instruments that are issued as senior debt notes, whereas ETFs are exchange-traded funds that have a position in an underlying commodity. In that they are unsecured, ETNs are similar to bonds. ETFs allow investors to invest in a fund that owns the assets they are tracking, such as stocks, bonds, or gold.
Is it possible to acquire and hold VIXY?
Investors cannot purchase VIX, and even if they could, it would be a high-risk investment. 1. The Volatility Index (VIX) of the Chicago Board Options Exchange is a market assessment of future volatility. The implied volatilities of a wide range of S&P 500 index options are used to create VIX.
When should I purchase UVXY?
As you may expect, UVXY has lost money every year since its inception on October 3, 2011.
Take a look at UVXY’s YTD performance versus the S&P 500 VIX Short-Term Futures Index (the index UVXY tracks).
UVXY performs worse than the index it monitors due to its double leveraged nature! As if that weren’t bad enough, you would have lost 91.31 percent of your money if you had bought UVXY when it initially began in 2011.
UVXY is “designed for short-term use,” according to the ProShares website, and investors should “actively manage and monitor their assets, as frequently as daily.”
Simply put, if you’re contemplating about buying and holding UVXY, don’t. Unless there is a major financial catastrophe and volatility reverses its direction, you are nearly certain to lose money.
Market Makers and UVXY
UVXY’s market price is always very close to the value of the S&P 500 VIX Short-Term Futures Index, according to computer algorithms used by ProShares and third-party Authorized Participants (market makers).
Authorized Participants will step in and short the requisite amount of stock if it diverges too much at any point, such as when a retail investor purchases a big number of shares and drives up the price. Similarly, if too many people sell their UVXY shares, the Authorized Participants will step in and acquire shares, causing the price to fall below the value of the index it monitors.
UVXY does almost all of its “market making” algorithmically. In other words, relatively few people spend their days sitting in front of their computers waiting for the price of one ETF to vary too much so they can correct it.
How ProShares Makes Money From You
It is not done pro gratis to manage a portfolio of 65,000+ VIX near-term futures contracts to keep an average of 30 days until expiration. If you purchase UVXY, your entire position will be subject to a 0.95 percent expense ratio. In the world of ETFs, expense ratios are conventional procedure, but there is something else ProShares does with its volatility ETFs that isn’t.
Note the significant amount of cash ($382 million) waiting on the sidelines in the accompanying screenshot of daily holdings.
What does ProShares do with the money it doesn’t have to invest? Simply put, after you buy UVXY, they begin collecting interest on the money you send them.
The investment prospectus for ProShare explains how a portion of any available fund can be utilized to buy low-risk fixed-income products like Treasury bills and money market funds/accounts.
Even if ProShares employs a money market account with a 1% cash interest, that’s an extra $4,000,000 in revenue from the investors who buy into their fund each year. They’re quite astute.
Will UVXY go to Zero?
UVXY avoids trading below zero via reverse splitting at ratios as high as 5:1 since financial assets cannot trade below zero.
When UVXY reaches a certain price point, such as $5.00, the fund management will reverse split it, creating 5 times the number of shares, bringing the price back to $25.00. This splitting procedure repeats as the value of UVXY decreases.
Long-term charts can be misleading because most UVXY charts do not account for the multiple reverse splits.
How to Trade UVXY
UVXY can be bought and sold like a stock because it is an ETF. After-hours trading is essentially the same as regular trading.
UVXY, on the other hand, does not give you a piece of a corporation like a stock does. Instead, you’re investing in a fund that tracks the two VIX futures that are closest to you.
The Long Game
When traders believe there will be a significant increase in volatility, they attempt to buy UVXY. Purchasing UVXY gives you direct access to the two most active (near-term) VIX futures.
UVXY will lose money every month as long as VIX futures are in contango and volatility does not rise. As a result, when going long, timing is essential, but it may be quite beneficial when volatility spikes.
UVXY’s price can double in a matter of days, which is why traders are always seeking for the best time to go long. There aren’t many other financial assets that may be purchased in an IRA or a standard brokerage account that provide that kind of possibilities.
The Short Game
Because it’s literally not suggested to hold UVXY long-term by its inventors, and because it’s lost money every year since its introduction, many traders are opting to sell UVXY short, which comes with its own set of hazards.
This has become a highly popular trade in recent years, but traders who want to short volatility ETFs should be warned that the price could rise extremely quickly. A 2x leveraged short volatility strategy would be wiped out by an overnight market crash or other panic-driven catastrophe. Nonetheless, many traders are willing to trade a low chance of a large increase in volatility with a large loss for a high chance of value deterioration with a modest gain. Because UVXY is leveraged 2x, the contango effect is amplified, which short sellers take advantage of.
Because of the popularity of shorting UVXY, borrowing shares can be difficult at times.
Why Trade UVXY?
UVXY is primarily traded to get exposure to volatility as an asset class.
Because the VIX Index cannot be purchased directly, traders must rely on ETFs such as UVXY to speculate and hedge against volatility.
Trading UVXY instead of VIX futures is a popular strategy because futures trading requires additional broker permission.
UVXY is appealing when volatility jumps since it is leveraged 2x and the S&P 500 VIX Short-Term Futures Index can trade up to 20% on a wild day. It’s not uncommon to see UVXY rise by 30 percent or more in as little as an hour.
The Ugly
- You short UVXY, volatility rises, and your short position suddenly loses 20% to 100% of its value.
Trading UVXY on the long or short side may be quite profitable if positions are appropriately sized. As things are, it’s usually preferable to avoid UVXY unless you’re okay with the increased exposure it offers. If you want to trade UVXY and are okay with its volatile nature, you’ll need to enter and exit positions rapidly.