Betting against the market with UVXY
So what is UVXY? Here is a brief description from ProShares.
UVXY: ProShares Ultra VIX Short-Term Futures ETF seeks daily investment results that correspond to one and one-half times (1.5x) the daily performance of $VIX.
Basically when market volatility (as tracked by $VIX) rises, UVXY will rise as well. However, it's not a 1:1 correspondence. UVXY is a 1.5x leveraged ETF. So for example, if $VIX rises by 20% in one day, UVXY will rise 30%. And if $VIX drops 20%, UVXY will drop 30%.
However, to complicate the matter, the price of UVXY can rise or drop more than $VIX performance, depending on whether there is contango or backwardation involved. (See Simple explanations of contango and backwardation.)
During a Down Segment in a Down Trend, UVXY has backwardation working like a tailwind to help it rise quickly. So UVXY can be highly profitable short-term trade in a Down Trend.
During a Down Segment in an Up Trend, UVXY has contango working like a headwind against it. Contango can cause UVXY to drop in price, even while $VIX goes up. UVXY can rise up sharply when $VIX surges up rapidly intraday, but as soon as volatility starts to drop even just a bit, UVXY can drop very rapidly. You may see a big gain turns into a big loss very quickly. Therefore, we don’t hold UVXY for any longer than 1-2 days in this kind of setup.
As you can see, it is extremely important to know which scenario you are trading when you are trying to bet against the market with UVXY.
If you are not familiar with contango and backwardation, read more about them here:
You can also monitor the current contango/backwardation level at VixCentral.com.
If the number is positive, it’s contango. If it’s negative, it’s backwardation.
In short, trading UVXY is a bit like driving a very fast race car. Become an experienced and skilled driver first, before learning how to drive a fast race car. Otherwise you may crash and burn.
Before you make plan to trade UVXY, we urge you to educate yourself as much as possible about UVXY.
Then test drive by paper trading UVXY whenever our trading system calls for:
If you want to trade UVXY with real money, then practice safe trading.
If you think that stocks are about to enter a a Down Segment in an Up Trend, resist the urge to jump in early and build a position with UVXY over multiple days. As we said, contango can cause UVXY to drop in price, even while $VIX go up. So jumping in early is not a good idea. Wait for a panicky day when volatility gaps up big at open and stays up. You can try day trading UVXY during such a day.
In general, trade small positions of UVXY. Use tight stops. Take profit quickly. Don’t be tempted to ride UVXY end to end.
UVXY: ProShares Ultra VIX Short-Term Futures ETF seeks daily investment results that correspond to one and one-half times (1.5x) the daily performance of $VIX.
Basically when market volatility (as tracked by $VIX) rises, UVXY will rise as well. However, it's not a 1:1 correspondence. UVXY is a 1.5x leveraged ETF. So for example, if $VIX rises by 20% in one day, UVXY will rise 30%. And if $VIX drops 20%, UVXY will drop 30%.
However, to complicate the matter, the price of UVXY can rise or drop more than $VIX performance, depending on whether there is contango or backwardation involved. (See Simple explanations of contango and backwardation.)
During a Down Segment in a Down Trend, UVXY has backwardation working like a tailwind to help it rise quickly. So UVXY can be highly profitable short-term trade in a Down Trend.
During a Down Segment in an Up Trend, UVXY has contango working like a headwind against it. Contango can cause UVXY to drop in price, even while $VIX goes up. UVXY can rise up sharply when $VIX surges up rapidly intraday, but as soon as volatility starts to drop even just a bit, UVXY can drop very rapidly. You may see a big gain turns into a big loss very quickly. Therefore, we don’t hold UVXY for any longer than 1-2 days in this kind of setup.
As you can see, it is extremely important to know which scenario you are trading when you are trying to bet against the market with UVXY.
If you are not familiar with contango and backwardation, read more about them here:
- http://seekingalpha.com/article/3969152-contango-uvxy-explained-one-time
- sixfigureinvesting.com/2016/09/the-cost-of-contango-its-not-the-daily-roll/
- Simple explanations of contango and backwardation
You can also monitor the current contango/backwardation level at VixCentral.com.
If the number is positive, it’s contango. If it’s negative, it’s backwardation.
In short, trading UVXY is a bit like driving a very fast race car. Become an experienced and skilled driver first, before learning how to drive a fast race car. Otherwise you may crash and burn.
Before you make plan to trade UVXY, we urge you to educate yourself as much as possible about UVXY.
Then test drive by paper trading UVXY whenever our trading system calls for:
- Down Segment in an Up Trend
- Down Segment in a Down Trend.
If you want to trade UVXY with real money, then practice safe trading.
If you think that stocks are about to enter a a Down Segment in an Up Trend, resist the urge to jump in early and build a position with UVXY over multiple days. As we said, contango can cause UVXY to drop in price, even while $VIX go up. So jumping in early is not a good idea. Wait for a panicky day when volatility gaps up big at open and stays up. You can try day trading UVXY during such a day.
In general, trade small positions of UVXY. Use tight stops. Take profit quickly. Don’t be tempted to ride UVXY end to end.