Is This UVXY Trade As Important As It Seems?

| March 25, 2015 | 0 Comments

options strategyIs This UVXY Trade As Important As It Seems?

As regular readers know, volatility levels can give us an idea of overall investor concern.  Is there fear of a selloff or market instability?  Volatility is the best gauge we have of uneasiness.

Of course, overall market volatility is most commonly followed by watching the VIX.  However, the VIX isn’t a tradable instrument, just the options and futures.

That’s why many traders turn to volatility ETFs/ETNs.  Exchange traded volatility funds make betting on swings in volatility much easier for the average investor.

The most popular exchange traded volatility product is iPath S&P 500 VIX Short-Term Futures ETN $VXX.  With an average volume of nearly 50 million shares a day, both retail and institutional traders are active in this ETN.

As a quick refresher, $VXX is a way to get long the first two months of VIX futures.  I’ve discussed it often in this space.  Here’s a recent article I wrote about $VXX.

Okay, but what if you’re a trader looking for a little more bang for your buck?  What if you don’t mind a little extra risk?  That’s where leveraged volatility products come in.

The most popular leverage volatility product is ProShares Ultra VIX Short-Term Futures ETF $UVXY.  This leveraged ETF works like $VXX, tracking the first two months of VIX futures.  However, the leverage means the return is 2x the return of $VXX or other similar exchange traded products.

Despite the leverage, $UVXY is still quite popular.  It trades over 20 million shares a day.  Here’s a link for more info on the ETF.

Like other volatility products, $UVXY tends to draw some really big trades.

Here’s a great example…

Late last week about 120,000 $UVXY January 2017 puts were purchased, most in one giant block.  The puts were at the 9 strike and cost $5.10 per option.  In case you’re wondering, that’s over $60 million in premium.  $60 million!

Okay, so what’s the meaning of this massive UVXY trade?

For reference, $UVXY is currently trading for $14.36.  That’s 80% below the 52-week high of $71.72 and basically right at the 52-week low.

Check out the chart:

large trade in UVXY options, a chart of UVXY

Here you can see the last year of $UVXY activity.  The ETF has consistently moved downward, except for a few spikes here and there.  Even during the elevated volatility period earlier this year, the price was mostly headed downward.

Keep in mind, the trader is making a nearly two-year bet on this trade.  And, $UVXY would have to close below $3.90 to be profitable.  That’s over 70% lower than the price today.

So, why do this UVXY trade?

Make no mistake, $60 million is a ridiculous amount of money to spend on any trade.  Moreover, we’re talking about a long put trade with two years to go!

Most likely, the trader is taking advantage of the ever decreasing prices of long volatility products which invest in futures.  You see, futures-based volatility products suffer from contango.  That is, the front month futures are cheaper than the back month futures.

This is the normal scenario for volatility.  As such, every time the fund rolls to the next future in line (due to expiration), the costs go up – and the price of the fund goes down.  Holding these types of products long-term is virtually guaranteed to be a losing proposition.

As such, this trade makes good sense.  However, there’s no reason for you to trade $5 options, two years out. You could trade closer month options for cheaper and still make plenty of money using the same strategy.

Yours in Profit,

Gordon Lewis

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Volatility Watch

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.