Lately I’ve been scoring some big wins on large caps, of all things …
It isn’t every day that big-dollar stocks lend themselves to beautiful options trades …
But my SharpBets program has been knocking it out of the park, with wins like +62% on Walgreens-Boots Alliance (Ticker: WBA), +75% on Walmart (Ticker: WMT), +71% on Macy’s (Ticker: M) … I could go on.
If you want in on this win streak, click right here. I’ll tell you more about my winning system for picking trades — and how you can apply it to your own portfolio …
Now, as great as these large-cap slam-dunks have been … as you probably know, I’m really a “vol guy.”
I can’t help it – volatility is what I love, and there’s so much money to be made from it once you know the ins and outs!
For example, I recently scored an 81% win on the volatility derivative “ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).”
Before you let the name get you freaked out … relax.
I’m going to walk you through this volatility ETF.
I’ll explain what it is, and how, with the right timing, I can practically print money trading it!
(Seriously, you’re going to want to read this.)
Ready? Let’s dive in!
UVXY, You Ain’t Got No Alibi
Now, to understand ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY), you need to have a basic grasp of the VIX and VIX futures.
The CBOE Volatility Index (Ticker: VIX), as you probably know, is a measure of implied volatility of S&P 500 (Ticker: SPX) options.
It’s referred to as the market “fear gauge” because when traders are anxious about what’s to come in the market, they like to hedge with SPX options.
This hedging increases the demand for SPX options, and increases the implied volatility priced into SPX options.
Which, in turn, causes the VIX to rise.
I was actually in the room for the “birth” of the VIX, and I could go into way, way more detail … but I’ll save that for another day! (Or subscribe to my free VIX Edge newsletter and I’ll send you a rundown of the VIX every trading day!)
Thinking About The Futures
VIX futures, just like any other futures contract, allow traders to speculate on where the VIX will be at a specific time in the future.
So, for example, if the VIX is currently trading at 18, and you think there will be more volatility by VIX futures expiration, you could purchase a VIX future at 20.
Here’s where things get interesting.
VIX futures MUST be equal to cash (or spot) VIX by the time they expire.
(By the way, VIX futures expire on one Wednesday morning each month, and expiration is based on the Tuesday close. This Wednesday is September VIX expiration.)
However, going into expiration, we often see futures trading above or below the actual VIX.
This is actually great, because if I see VIX futures are trading $2 above VIX spot price a week before expiration, I know these futures must drop to meet the VIX within the next week (unless, of course, the VIX rises).
Of course, if the opposite were true, and VIX futures were trading $2 below VIX spot, I’d expect to see either the VIX fall or futures rise.
I track VIX futures relative to VIX spot by looking at the VIX futures curve.
The green line is VIX spot, and you can see each futures contract trading increasingly higher above spot VIX.
This is called a contango.
(If futures were trading below VIX spot, this would be backwardation. It is less common than contango, but it does happen.)
Now, this brings me to UVXY (finally, right?).
UVXY provides 1.5 times leveraged exposure to the S&P 500 VIX Short-Term Futures Index, which tracks the near-term VIX futures contracts.
Essentially, UVXY is long 1.5 times the VIX futures contract that is 30 days from expiration.
So, if we know that VIX futures are in a contango (higher than the VIX) …
And must be equal to the VIX by expiration …
Then we know that UVXY, which tracks these futures, will also fall.
Now, of course, don’t get me wrong – the VIX can and does unexpectedly spike (like we saw Friday), so making a bet on UVXY to fall isn’t a “sure thing.”
Plus, of course, sometimes the pricing of UVXY options will make it difficult to trade this phenomenon profitably.
In general …
Chart courtesy StockCharts
You can see that UVXY certainly isn’t a “buy and hold” type of investment … to say the least.
Just a few months ago, UVXY underwent a 10-to-1 reverse split that took its share price from $4 to $40.
Now, it’s already sitting back in the lower $20s, and I wouldn’t be surprised to see the ETF near $10 in the next few weeks.
Of course, just like with anything else, it’s easy to get over confident and get burned on UVXY. I do it all the time.
But with a little bit of skill, and a little bit of luck, this ETF can be used to practically print money!
Lately, we’ve been seeing an extra-wide gap between VIX spot and futures as we near expiration.
This is great news, because it gives me plenty of opportunities to profit by playing VIX derivatives like UVXY, and VXX (which also tracks VIX futures).
But of course, you need to always use caution, because days like we saw yesterday can obliterate otherwise well-played UVXY trades.
If you want to learn more about how to trade UVXY, and the VIX more broadly, I recommend subscribing to my VIX Edge newsletter. It’s free, and it isn’t uncommon for me to call out specific contracts I’m trading, and what I’m watching with volatility every day.
But if you take nothing else out of this article, please just remember this: do NOT try to buy and hold UVXY.
I can all but guarantee it will end badly.
Your Only Option,