Critics on Twitter, StockTwits, and other social media platforms will tell short sellers (as well as call writers) of UVXY/VXX/etc. that it will require a whole lot of luck to continue to place these trades and not get mauled. My retort to that is that over time and over a large number of trades, it requires much more luck to go long volatility products and not get mauled.

UVXY/VXX/etc. have consistent drag in the form of contango, beta slippage (which is even worse in the leveraged UVXY), theta decay (for call buyers), and just the human tendency to adapt to fearful situations. The luck required to time long vol product trades and consistently succeed despite these headwinds is enormous. Such headwinds can manifest themselves in the form of a green VIX and red UVXY/VXX/etc.:

Okay, I get it — that’s not enough to deter the gamblers. After all, the charts for UVXY and VXX leave much room for successful long entries and exits, don’t they? Maybe the several noted reverse splits in the chart below don’t sway longs to consider to the contrary of their notions? Maybe they think they can time one of those blips in the chart below? The last meaningful blip being more than 2 years ago, in August 2015:

Maybe they are thinking the “big one” is right around the corner.  Does it matter, though? Again, isn’t it easier to simply take the short side of the trade with a responsibly sized position? It’s probably even easier to not even play with these “fire starters” until after a major spike has come and short it from that point onward.

Successful professional casino gamblers would look at this and wonder why anybody would buy these products… and why anybody wouldn’t want to take the other side of that trade. Sure, they wouldn’t necessarily understand the risks involved in the short vol play, but there are ways to hedge these bets (small position sizing being the best hedge of all).

So the next time you feel like taking a long position on a volatility product that has frustrated legions of would-be market timers….. my only question for you is: “Do you feel lucky?”

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