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If you dig down into the prospectus on any leveraged ETF there is a termination clause.
They can all go to zero. VXX is not subject to the exact same scenario as XIV, but there's still a threat to the upside involving some strange market dynamics -- see what happened with TVIX last year.
At the time a little over a year ago when TVIX was heading toward $1000 there was a great fear that the whole vol complex would break.
Those of us in the vol space already knew that TVIX was an unkosher product, and nobody was surprised when it went haywire, just as nobody was surprised over XIV.
UVXY is a big question mark in my mind.
1) Since it survived Volpocalypse and also March 2020, you could say that it's battle tested in the most extreme conditions.
After Volpocalypse Proshares did lower the leverage on UVXY, again due to legal boilerplate in the prospectus that allowed them to do it, but the fact that they were willing to tweak the product and then kept it going tells you that it's too important of a money maker for them.
And if you look at the options volume and spreads on UVXY it's actually gotten a lot stronger and maybe even more liquid than VXX on some days. Which seems incredible if you think back to the relatively poor liquidity it's had in the past during times like Brexit.
Right now you've got a penny wide spread on the 50 delta calls for next week, not too shabby for the likes of UVXY. I guess this must be due to retail fascination. Pros tend to eschew it but retail loves it.
2) That being said, since September of last year UVXY options are known to be broken, pricing is screwy. So if you know how to exploit the anomalies in pricing them when they arise, power to you, but if not then you need to roll up your sleeves and figure it out.
No such issues as to management or pricing occur with VXX AFAIK, so in my view it is the safer product of the two to play with. At times of peak VIX, the liquidity tends to go into VXX and the spreads become tighter than any other risk management product. I think you get about the same amount of convexity as UVXY, too, on atm calls bought at the beginning of a crisis.
@Erikie do you trade VIX options or futures or both, and what kinds of strategies do you prefer?
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
Can you suggest any resources for learning about pricing on VIX/Volatility ETF options? AFAIK these options are not priced using the Black Scholes model, but I can't find much information about how they are priced. I know there are lots of custom models being utilized by market makers and firms that are scalping second level greeks (gamma, vanna, charm). All I can find are a bunch of white papers on various models I've never heard of (stochastic volatility with jumps, Hawkes jump, Jump-Garch, etc).
The guys at Option Pit, who are vol gurus, have both ongoing courses and an extensive library of videos on the subject. Andrew's "VIX Made Easy" and VXX Made Easy" video series are extremely good. I think I wrote about learning this material in my elite journal mentioned above.
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
Options are priced according to supply and demand. Black Scholes and other pricing models are only useful for suggesting an option value. However, UVXY options are skewed, i.e., they favor the puts, because it's in a near-constant down-trend, so the puts are more expensive than similarly OTM-distanced calls. Plus, since UVXY can't go lower than 0, but it can go up to infinity, that also adds natural reverse skew experienced by most equities.
I'm a little confused about this. Looking at the options pricing on UVXY I see that IV and price are much higher for OTM calls than puts. This makes sense to me as the UVXY will tend to make slow and steady moves down but sudden and violent moves to the upside. This is the opposite of most stock or index options which would price OTM puts much higher as the risk is for sudden moves to the downside.
Am I missing something here or possibly getting bad data from Fidelity?
Trading: Futures VX ES CL GC SI ect , STOCK and Index Options
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The primary product is the VIX and yes there is upwards skew because there is the uncertainty. I have never seen the implied volatility in the vix lower then 8 so that means the putcurve flattens on those levels
I'm guessing you mean that you've never seen the VIX below 8, since the volatility on the VIX (VVIX) has never dropped below 50. So that makes sense that VIX options would flatten out at 8 - they currently have a low strike price of 10, not sure if that's always been the lower end though. But for UVXY the lower end would theoretically approach 0 if it weren't for the reverse splits (from the carry cost of holding futures in contango)
I've noticed that like VIX options, UVXY options have greeks that do not behave like normal equity/index options. But maybe that's the mispricing that @suko was eluding to in an earlier post. I'm also not ruling out crappy data from Fidelity. They only recently starting pricing their VIX options correctly (based off the corresponding VIX futures rather than the VIX index.)
"at hercules investments this week sir i
11:53
am so
11:53
angry at uvxy i've got 55 million
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dollars in calls in this thing and it is
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not behaving like it should
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we have been we have been uh slamming
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this thing"
"Persistence is very important. You should not give up unless you are forced to give up." -- Elon Musk
