The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.

Hey Traders,

It finally happened!  

I had been waiting for it to happen for what felt like months …

The ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) finally reverse split.

On Friday the ETF – a 1.5X levered version of VXX reverse – split 10 for 1 going from, 2.00 to 20 dollars.

Now, there isn’t a lot one can do on Friday except directly trade the ETF. 

Today, though, the new options are attached to the reverse split list.

Now I’m in business and able to trade. With the low volatility environment we are in, the VIX futures are producing a MASSIVE contango:

When VIX futures are in a contango, it creates a HUGE ‘roll yield’ out of UVXY. While it’s a little more complicated than that, I’ll break it down briefly into a VERY basic explanation of what is happening.

Every day, UVXY is selling the front month future and buying the back month future.  

While it’s not TECHNICALLY what happens, a simple way to think about what UVXY is doing is this:

UVXY is essentially running a lemonade stand where it sells the lemonade at 15.70 and buys the inputs for 17.30.

That is why the ETF is almost constantly losing money.

Split adjusted 5 years ago, UVXY would have been $6k a share:

Now there is risk, and you can see how UVXY went (split adjusted) to over $13k. The ETF can move.

But when the reverse splits happen, it can be the best time to be short this ETF using put options or even selling call spreads.

We are going to be trading this thing up over the next few weeks in the Trading Desk. 

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian