The temptation to buy UVXY/TVIX/VXX/VIXY/etc. when the VIX is low can be pretty strong at times.  As I write this, it’s the third consecutive bright green day for the S&P 500; yesterday the VIX closed barely above 9.  Surely that was an ideal time to buy UVXY, right?

Wrong.  As we can see in the picture below, the VIX did go up a little bit, but UVXY and VXX still went down.  As soon as you think these long VIX products can’t possibly go any lower, they manage to go lower anyway.

The problems start to occur when we try to apply “logic” and pick a bottom for UVXY.  These financial products are bottomless money pits that briefly yield high returns for extremely lucky folks on occasion.  The question is:  Would you rather be a buyer of lottery tickets, or the company that sells them?  Who makes money over the long run, the buyer or the seller?  Undoubtedly, you already know the answer to that.

I can almost hear the objection now:  “But surely the VIX will go back above 10 soon enough…”  There you go with that “logic” again!  You might be right, but with UVXY and all of the other long VIX ETP’s, some price deterioration occurs on a daily basis, so the green days aren’t as green as they “should” have been, and the red days are worse than “logic” would dictate.

If you feel that the equities markets are too high and seek a favorable position for a down move, rather than buy UVXY, consider instead buying small quantities of assets that are not directly correlated to the S&P 500; examples might include precious metals and currencies.  Whatever you choose to do, I would reiterate that bottom-calling “logic” and a long UVXY position are things to avoid, now and always as it creates a bad discipline for using such VIX-ETPs.

4 Comments
  1. Seth Golden 1 year ago

    Love the graphic title Dave, very fitting!

  2. Shedletsky 1 year ago

    The central argument would be more interesting if there were backtested data around different long UVXY strategies.

    For example, if you could show that whenever VIX is under 9.5 for three days in a row a trader who buys UVXY and holds for a week typically loses X%, then this article would be a lot more useful.

    More logos less ethos.

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