Follow Up to Trade Alert - (UVXY) SPLIT NOTIFICATION - May 20, 2015

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Trade Alert - (UVXY)- UPDATE-SPLIT NOTIFICATION

Buy the ProShares Ultra VIX Short-Term Futures ETF (UVXY) at $9.37 or best

UPDATE

5-20-2015

Portfolio weighting: 10%

Number of Shares = 1,066 shares

 

The ProShares Ultra Vix Short-Term Futures ETF (UVXY) underwent a 5:1 reverse split today.

This is to prevent the share price from going to zero, where the mathematics of this fund will eventually take it.

It is hard to enter in an order at zero, or some fractional cents.

If you are holding the (UVXY), the number of shares you own is divided by 5, while the market price is multiplied by five. There is no net change in the value of your position as a result of this reverse split.

The reason this fund can only fall over the long term is because of the contango that permanently haunts it. While the front month Volatility Index (VIX) is trading at $12.90 today, three-month volatility is at a lofty $15.50.

The (UVXY) buys three month volatility and runs it into expiration. It then multiplies this negative impact with 2X leverage. The guaranteed loss on this trade is therefore $2.60, or 16.8%. It is a perfect money destruction machine.

Do this every month, and eventually you use up all your capital. You see this most clearly on the long term split adjusted (UVXY) chart below, which has it going from $10,000 to $42.33 in only three years, a loss of 99.60%.

This is why you should only hold the position for a few days or weeks at the most, and even then to hedge long positions in other stock or indexes. You only want to own it during the brief, frenzied volatility spikes that occur, as we did with the last trade.

You might want to ask the question, ?Why aren?t we shorting this thing??

The (VIX) is prone to sudden, extreme moves to the upside whenever an unforeseen geopolitical or economic event takes place, such as a terrorist attack or a bad nonfarm payroll number.

It can double in days, as traditional long side investors rush to buy some downside protection. It has done this a few times in the past year. During the crash, the (VIX) ratcheted all the way up to $90.

Often you get large moves of 20% or more right at the opening, as professional traders, who are almost always short volatility, rush to cover short positions, all at the same time. As a result, many of the people why try this strategy often go bust.

On top of this, your broker is unlikely to extend the margin you need to put on a decent position, especially to beginners.

The concern is that when the customer wipes themself out, they will take a piece of the broker?s capital with it. Customers who lose money in this way often end up suing their broker, another turn off.

The people who do make money at this tend to be large teams of very experienced traders which massive computer and programming support executing complex risk control algorithms. It costs millions of dollars to put all this together.

Needless to say, you should not try this at home.

Here are the new numbers that should apply to your existing position, based on 10% of a $100,000 notional model trading portfolio:

long 213.2 (UVXY) shares at?????$46.85

new stop loss: $40