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Why isn't UVXY going down?

An interesting picture is emerging among the leveraged VIX funds lately. ETFs such as UVXY and TVIX have not been going down at the same rate many have grown to expect. Since July 26, UVXY has not created a new low. This is the longest such period so far this year. In fact it's the longest period since February 2016. What's causing this unusual behavior?

VIX hit an all time intraday low of 8.84 on July 26, 2017. Since then, the VIX has had a few spikes along the way, each time receding to a slightly higher floor, and as of the writing of this article on August 30, rests just above 11. In the span of a month, VIX has essentially risen 25%.

Many new traders of the long volatility ETFs are starting to describe “support” on UVXY around 30 or 30.50. And in a way, they are not wrong. The ETF has not had a close below 30 in over 3 weeks, and UVXY certainly seems to bounce off of this level each and every time it has come close in the month of August.

UVXY from July 24, 2017 to August 30, 2017


In order to maintain this support however, we have to remember that VIX had to rise almost 25% from its low of 8.84 on July 26 to its current level around 11. Of course, it's important to understand that UVXY and TVIX follow VIX futures and not the actual VIX index, but the two are correlated enough that we can look at the VIX index to make generalizations about the trend of futures and therefore these funds.

It's interesting to note that although UVXY tracks double the movement of VIX futures on a daily basis, when you back up and look at a whole month that the VIX index is up 25%, UVXY is only up 8.5%.

VIX from July 24, 2017 to August 30, 2017


Although a trader holding a long position in UVXY has had a slightly safer trade than usual by being able to count on support around the 30 level, one should certainly prepare for it not working one day. Essentially that support level is a bet that VIX is going to continue to increase at the rate of 20-25% a month. That would put VIX at about 13.2-13.7 by late September in order to maintain that support, and 16-17 by the end of October. This certainly brings VIX closer to its historical mean, and such a move is possible. But what if VIX returns to its recent range of 10-11 for an extended period of time? Futures will ultimately have to follow the index lower.

If this trend breaks and futures fall just 10% from their current levels, UVXY would suffer losses of about 20%, putting it at 24. This would be a very painful move for many holding this fund long. On the other hand, it would be a welcome change for traders shorting these volatility funds, as they would finally be able to see some profits on their trade (assuming they entered at the worst possible time around July 26).

There have been dire warnings for months about the short VIX trade unwinding violently one day. And while that may still happen, this seems to be a rather orderly unwinding. In fact, many long term short sellers of these volatility ETFs are not much worse off than they were on July 26. Assuming one held their entire short position during the 4 VIX spikes over the last month, they would only be down 8.5% today. (Although this completely ignores the fact that they could have been down by as much as 50% during the multiple VIX spikes that followed the July 26 low.)

While some traders have been using this apparent support to their advantage and others have found it a source of frustration, it is useful to prepare for a day when this apparent support level is no longer there.


Happy VIX Trading!

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