# ProShares Short VIX futures (SVXY)



## james4beach (Nov 15, 2012)

Does anyone here trade SVXY? This one (and a similar exchange traded note, XIV) benefit in a surreal way from a low volatility rising market. Which is what we've had for several years now.

XIV is an ETN which is unsecured debt note, no assets, whereas SVXY is an ETF that actually contains futures.

SVXY one year return is 181% and 5 year annualized return is 44%. The flip side of this is that when VIX rises, this thing falls awfully hard. It sharply fell 70% in 2015. The primary problem is the intense drawdowns to the tune of 90%, which this analyst describes as a heart attack waiting to happen.

However, the gains are so intense during low volatility periods, that if you can somehow time the market and predict phases of low volatility, perhaps you could hold it in selective periods.

Warning: this is a very dangerous instrument and not suitable for buy and hold! I have never traded it.


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## jargey3000 (Jan 25, 2011)

.....hmmmmmm?..... veddy interestink......SVXY you say, eh?
_"Luvvy, get me my broker on the phone."_


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## james4beach (Nov 15, 2012)

Oh no, jargey, remember the author describes this as a "heart attack waiting to happen". The only circumstance in which I'd buy this is if there's a serious correction, volatility goes way up and this thing crashes. Then it would be worth buying.


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## andrewf (Mar 1, 2010)

james4beach said:


> Does anyone here trade SVXY? This one (and a similar exchange traded note, XIV) benefit in a surreal way from a low volatility rising market. Which is what we've had for several years now.
> 
> XIV is an ETN which is unsecured debt note, no assets, whereas SVXY is an ETF that actually contains futures.
> 
> ...


I do, in a very roundabout way. I hold long term puts on UVXY. I'm way more comfortable doing that than holding XIV/SVXY. I prefer ZIV.


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## james4beach (Nov 15, 2012)

andrewf said:


> I do, in a very roundabout way. I hold long term puts on UVXY. I'm way more comfortable doing that than holding XIV/SVXY. I prefer ZIV.


That's interesting, can you describe the motivation for that position? UVXY keeps decaying with time, so I presume the LEAPS puts are pretty expensive on it. Just curious how you would describe the nature of that bet, since you have a derivative (put) on a derivative (UVXY) of a derivative (VIX). My brain honestly can't keep up through that chain of indirection!


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## lonewolf :) (Sep 13, 2016)

J4B I was looking @ UVXY puts last night & the price decay does seam to be factored into the price meaning expensive i.e., if the spy puts were selling for that amount & I thought the market might crash I do not think I would play the down side with puts if premium was that high. I will play spy puts @ premium they are @


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## andrewf (Mar 1, 2010)

james4beach said:


> That's interesting, can you describe the motivation for that position? UVXY keeps decaying with time, so I presume the LEAPS puts are pretty expensive on it. Just curious how you would describe the nature of that bet, since you have a derivative (put) on a derivative (UVXY) of a derivative (VIX). My brain honestly can't keep up through that chain of indirection!


It's a bit of a coinflip bet. My current position is a Jan 2019 $5 strike put that I bought for $2.49 in June (when UVSY was trading at $10), now worth ~$3.40. Split adjusted that is a $20 put that cost a hair under $10 and is now worth about $14, UVXY has just been getting hammered in the past month or so, down to about $15 (over 60% decline in 4 months). The very appealing thing about this position is that because the implied volatility is so high, the value of the option is fairly stable. So even in the event of a VIX spike, I can get out without losing 100%. And if you look at long term UVXY performance, it has a high probability of losing 90%+ over 1 - 1.5 years. My plan is to exist the position at 80% gain (max profit is ~95% or so).


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## lonewolf :) (Sep 13, 2016)

If the strike was 5 dollars & if UVXY went to zero the most the put could be worth is 5 not sure how to get $20 dollar value from $5 strike


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## andrewf (Mar 1, 2010)

lonewolf :) said:


> If the strike was 5 dollars & if UVXY went to zero the most the put could be worth is 5 not sure how to get $20 dollar value from $5 strike


There was a 4:1 reverse split in the mean time. I probably should not have mentioned it because it might have confused people.

As I said, my exit plan is 80% gain, or 1.8*2.49=$4.48, which will happen at least when UVXY drops to $0.52, prior to the reverse split. With the 4:1 reverse split, we're talking a price target of $2.08 or so, which is an 86% reduction from here. Very good chance of this occurring in the 15 or so months left on the put. Of course, if there is any non-intrinsic value in the option, I would likely be able to exit a bit earlier with an 80% gain.


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## Mechanic (Oct 29, 2013)

I have traded both XIV and VIX several times. Have had some good trades and also got burned a few times. Like you say, when it falls it can fall hard and you have to be prepared to wait for a recovery (sometimes) or take some nasty losses. I have also suffered a few splits whilst holding and they didn't work out that well.


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## janus10 (Nov 7, 2013)

I trade SVXY and HVI (Canadian equivalent although not able to trade PM and AH nor with the benefit of a liquid options market).

Shorting vol (with the very occasional long vol trade) is the key strategy for me now.

I've been trading short vol for just over two years. Although you could buy and hold, I much prefer waiting until you get a vol spike (spot VIX above 17, and M1&M2 in backwardation compared to the VIX futures months in the rest of the curve).

Unfortunately, it's been a tough year to do well (e.g > 50% returns) because of the historically low volatility we've seen. In just over two months SVXY is up more than 50% and we didn't even have a minor correction. I ended up making just 20% but got out after 5 weeks as I followed a plan to exit once targets were met.

I'd encourage you to look at it seriously to determine if this could be incorporated into your own investment thesis.

I believe if you bought $5,000 of SVXY when it first debuted in October 2011, it would be worth close to $85,000. 

UVXY is more dramatically opposite. Something like $42M invested would be worth less than $16. 

Selling long dated ITM calls on UVXY after big vol spike is the easiest money I've made. Only problem is you need a margin account and the margin impact is not the best use of your capital. A better structure would be selling a bear call spread or maybe buying a bear put spread.


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## andrewf (Mar 1, 2010)

I have dabbled in spreads in the past. You can't do them in registered accounts though. I find spreads are much more of a coinflip, and you're somewhat likely to see -100% returns.


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## james4beach (Nov 15, 2012)

Wow look at this, S&P 500 was down just 0.9% and SVXY fell about 10% this morning!

Can you imagine what's going to happen on a day the market _actually_ falls really hard? Brutal!


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## andrewf (Mar 1, 2010)

VIX is not tied to the S&P, it is tied to implied volatility of S&P500 options. So, implied volatility is up somewhat (though still historically quite low).

My option is down about 3% today. Nothing to get too excited about .


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## james4beach (Nov 15, 2012)

It's tied to the S&P 500 in that the VIX is calculated from the S&P 500 options, and is asymmetric to the down side. Down days in the index will almost always cause a higher VIX reading.

Just a little boost in volatility, and a 10% drop in XIV. I can just imagine a day where VIX soars, this thing would totally implode!


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## andrewf (Mar 1, 2010)

Well, VIX moved up by ~10%, so I'm not exactly surprised. Small increases in implied volatility are large % increases when coming off a low base.

I guess it goes without saying that if this freaks you out, you should probably think twice about trading in this space.


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## james4beach (Nov 15, 2012)

What intrigues me is how popular these VIX speculation approaches are among retail traders. This is a really hot area and some of these ETFs (XIV, TVIX, etc) are insanely popular. I think many people are going to get wiped out when (eventually) the VIX starts swinging around like crazy.

I just find it interesting to watch. A hallmark of this current bull market has been the low volatility and rapidly rising market along with no corrections, no volatility. This has led to people piling onto the "short VIX" trade because it's been so profitable in the last few years.

In the last bull market, the fad was yield chasing with mortgage-linked paper, and derivatives of such paper, as well as REITs and other high yield products.

Anyway, this is a current bubble fad. When it blows up, it's going to be spectacular and you can get a front row seat with XIV


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## andrewf (Mar 1, 2010)

And right back down.

Anyway, what blows me away is how much dumb money is invested in these long VIX funds. VXX regularly has over $1 billion AUM.


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## jollybear (Jun 28, 2015)

I guess this is one of the reasons day trading gets such a bad wrap. Retail amateurs stumble across a high octane product like double leveraged volatility etfs and pull up a chair at the table.


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## james4beach (Nov 15, 2012)

Traders love the big daily moves in these. In a market that has been very calm for 8 years it's hard to find securities that move. My guess is that traders flock to these because they actually move!

UVXY for example, +31% from Monday to the peak Wednesday. Then -21% from Wednesday's peak to Friday close!
SVXY is a bit milder, -14% from Monday to Wednesday low. Then +14% from Wednesday to Friday close.

Still, when the market does start moving again, I really think these will wipe out many people. If you can get 20% to 30% swings during a relatively calm week, imagine what will happen during turbulent times.


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## andrewf (Mar 1, 2010)

Agreed. My protection is that when that happens, the IV of options skyrockets and cushions the option value. Short term returns are quite volatile, but long term returns are pretty reliable.


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## Rusty O'Toole (Feb 1, 2012)

If you really want to make money trading volatility you should read this article.

https://steadyoptions.com/articles/the-incredible-option-trade-in-vxx-r289/


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## andrewf (Mar 1, 2010)

Indeed, that is one way of doing it. I trade in registered accounts, so spreads are not an option.


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## Rusty O'Toole (Feb 1, 2012)

Put in a bid today for 10 Jan 18 30 35 put spreads in the VXX @ #2.90. Cost of trade $2900. Possible profit $2100 if VXX keeps going down. Seems like a safe bet. VXX is rising today so the bid may be hit, if not I will raise it near the close.


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## james4beach (Nov 15, 2012)

I ran into something interesting yesterday. Apparently Interactive Brokers charges some accounts an "Exposure Fee", if they engage in particularly high risk activity that the brokerage thinks may lead to a blowup (negative equity). Two things that can trigger the Exposure Fee are naked short options, and volatility ETF positions.

IB doesn't disclose how they calculate the Exposure Fee, but I understand their motivation. Their models can identify certain account behaviours that have a high probability of blowing up. If the account goes negative, IB still has to make good to the options clearing house, so they can actually suffer a loss due to a reckless customer.

I googled around and found some funny threads where people are complaining about thousands of $ a year in Exposure Fees. Can you imagine what kind of insane positions they must be carrying?


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## Rusty O'Toole (Feb 1, 2012)

Did they say what positions they were carrying? It used to be if you were overextended you got a margin call. I have had margin calls on positions that were not in any danger because they were protected by put options. That was a long time ago but I wouldn't put it past any broker to soak a customer for a flimsy reason. 

PS the VXX position closed $10 to the good. This is unusual, my trades usually start with a loss. We shall see what we shall see.


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## james4beach (Nov 15, 2012)

I know a guy who runs a hedge fund and I asked for his thoughts on XIV / SVXY. He said the outlandish returns could continue for a long time, but over the last year XIV has become much more sensitive to small declines in the market, often falling 7x to 12x the S&P 500's tiny -2% to -4% moves. It used to only move 3x to 5x the index.

Hedge fund guy says:



> I think of XIV as carrying gold bars across a frozen lake. As long as the ice doesn't break, you can keep stockpiling. But the ice is getting thinner (VIX futures getting pushed lower), and there are more people carrying the gold (increasing open exposure on VIX futures). At some point, with enough people standing on the ice, the ice will break. And when it does, everyone standing on that lake is going to fall into some cold water, and all the gold they're holding will be lost in the lake.
> 
> I don’t think the short vol XIV trade is a "bubble" in the sense of the dot.com bubble, *but it is a massively crowded trade that is becoming increasingly unstable* - increasingly sensitive to market moves that can make it explode.


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## andrewf (Mar 1, 2010)

I have a better explanation for the higher XIV senstitivity. VIX has fallen, so unit increases in the VIX level represent larger % changes. And keep in mind, that VIX is not directly correlated to S&P returns. It represents implied volatility of S&P500 futures, so it does not react only to actual change, but expectations of future change.


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## andrewf (Mar 1, 2010)

Rusty, still holding the vxx put spread?

I still have my uvxy puts (split adjusted strike of $20*), which are trading at split adjusted $15, or 50% gain. My profit target is 80% gain, but I'll keep an eye on the Jan 2020 options and roll out if I can get an appealing trade between now and June. Uvxy is down almost 10% in just the last couple days.

*I state it in split adjusted terms to avoid confusing people. I bought in June, before the 4:1 reverse split, so divide all the $ figures by 4 to see actual.


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## james4beach (Nov 15, 2012)

Did anyone notice this fascinating, sharp increase in VIX today? Up to 13.8 which is a pretty big jump in the context of the last year:
http://stockcharts.com/h-sc/ui?s=$VIX&p=D&yr=1&mn=0&dy=0&id=p68195333599

I think it's interesting because the S&P 500 itself did not change much today. Just down -0.66%, a hair below an all time high! The $SPX pattern itself just looks like a regular (or even a strong) rally. And yet the VIX hit its highest reading in 5 months.

Is something (in some corner) blowing up?


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## andrewf (Mar 1, 2010)

Implied volatility of s&p500 options. People are betting there will be bigger moves in the near future.


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## james4beach (Nov 15, 2012)

Wow I guess those options pricers were correct... look at the market respond today.


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## andrewf (Mar 1, 2010)

Well, I wouldn't get too excited yet. Could just be the market blowing off some steam.


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## james4beach (Nov 15, 2012)

The TSX chart looks more bearish than the SPX, to me.


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## james4beach (Nov 15, 2012)

Wow, XIV & SVXY down 30% from the mid January high. Admittedly though that's still not a major move considering these ETFs can easily have 70% drawdowns!



andrewf said:


> Well, I wouldn't get too excited yet. Could just be the market blowing off some steam.


I agree. This all still looks within the range of a normal, small correction.


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## james4beach (Nov 15, 2012)

Interesting, SVXY is down much more than XIV today. Any idea what's going on? I thought these were more or less the same thing.

SVXY -20.5%
XIV -13.2%


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## james4beach (Nov 15, 2012)

Very interesting... XIV is *down another 50% after hours* (it's lost half its value after today's close) with active trading AH.

Perhaps investors are smelling that the fund is about to be dissolved. Credit Suisse's prospectus says the fund could be shut down if there's an intense volatility spike, maybe that has occurred now.


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## james4beach (Nov 15, 2012)

I bought a few shares of XIV at 11.01 just to see what will happen. Both XIV and SVXY collapsed 90% after hours and are acting like they will dissolve and go to $0 tomorrow.

Here's my rationale... my downside is $60 (total I spent) and upside is maybe $300 to $500 if the market subsides tomorrow. I give about 75% chance XIV will collapse tomorrow and delist. Expected outcome = 0.75 * -60 + 0.25 * 300 = positive


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## andrewf (Mar 1, 2010)

Something odd has happened here... maybe algorithmic trading causing a feedback loop? There must be a tonne of option activity

Regardless, what happened to XIV is why I short volatility by buying puts on long volatility ETFs, like UVXY.


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## james4beach (Nov 15, 2012)

andrewf I think we're going to get a real treat in the a.m... Tuesday's trading on XIV, UVXY, etc should be just out-of-this-world.

XIV and SVXY are significant because they had (between them) about $3 billion in assets. Billions of dollars short the VIX! Tomorrow these guys might be forced to buy unbelievably large amounts of VIX futures... imagine what this will do.

Here's one possible scenario: a XIV/SVXY unwind causes the VIX futures price to soar on short covering. Other investment banks who are short the VIX abandon their trade and cover as well, making the VIX futures spike. Traders (and bots) watching this perceive this as volatility going to the moon, _and so it happens_: the bots dump everything in response. The frightened bots load up on SPY puts for protection, *causing the actual spot VIX to soar*.

This "tail wagging the dog" effect has been hypothesized by several commentators. Short VIX has become an extremely popular trade, and now it's blowing up.

So I think VIX/SVXY are more than a side show. They can actually cause significant harm to the market. I wouldn't be surprised if the President's Working Group on Financial Markets and/or of the Federal Reserve steps in and tries to smooth over the VIX futures to prevent this kind of cascading derivatives blow-up.


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## andrewf (Mar 1, 2010)

I still don't agree that short vix has been a popular trade. If it were, vix futures would be in backwardation, not steep contango.


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## james4beach (Nov 15, 2012)

I'm still thinking about it. Here are a couple artices:

https://www.bloomberg.com/view/articles/2018-02-06/people-are-worried-about-the-stock-market
http://www.greatponzi.com/articles/20180206-vix-blowup.html

Currently I'm also exchanging notes with a guy who runs a quant hedge fund. He's unbelievably happy these days because he runs a long volatility strategy.


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## james4beach (Nov 15, 2012)

From the Bloomberg article, and echoed in the second one, this suggests these two funds may have been a big cause in the recent VIX surge



> The basic way that XIV works -- worked -- is that you short volatility to Credit Suisse, and Credit Suisse hedges that by shorting volatility to the market. More specifically, Credit Suisse presumably hedged its XIV exposure by selling VIX futures. The bigger XIV got, the more VIX futures Credit Suisse had to short, driving down the level of the VIX (and, perhaps, driving down actual volatility in the stock market). And over the past few months and years of low volatility, XIV kept getting bigger -- short-volatility exchange-traded products reached over $3 billion of assets -- and Credit Suisse sold more VIX futures to hedge it. That drove the VIX down more, which made the short-VIX trade more profitable, which pulled more assets into products like XIV.
> 
> But when XIV basically went poof in a day, Credit Suisse had to buy back all of those VIX futures. That drove up the price of VIX futures, exacerbating both volatility generally and XIV's losses specifically. The low-volatility bets that had been pushing down volatility for months pushed it up yesterday.


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## OptsyEagle (Nov 29, 2009)

Now shouldn't the XIV be at least going up in some amount when the VIX is going down, on a day like today. What am I missing about this. 

Not that I would ever invest in it, but I am the curious sort of guy.


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## james4beach (Nov 15, 2012)

OptsyEagle said:


> Now shouldn't the XIV be at least going up in some amount when the VIX is going down, on a day like today. What am I missing about this.
> 
> Not that I would ever invest in it, but I am the curious sort of guy.


I hold 5 shares of XIV so I wonder too. The thing is, XIV is a dead man walking because the issuer will terminate the fund and completely liquidate it on February 20. I have not read anything that makes me think it still "acts as intended" between now and Feb 20. Does the issuer even use arbitrage to keep the price where it should be according to the VIX? I wouldn't count on it.

SVXY is the one that survived that volatility event. Its price should still be acting as designed, on a daily basis.


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## Mechanic (Oct 29, 2013)

OptsyEagle said:


> Now shouldn't the XIV be at least going up in some amount when the VIX is going down, on a day like today. What am I missing about this.
> 
> Not that I would ever invest in it, but I am the curious sort of guy.


Normally XIV is inverse to VIX but in this case Credit Suisse have actually shut down XIV....poof !!! I had been looking at it but thank goodness didn't pull the trigger


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## james4beach (Nov 15, 2012)

andrewf: are you currently buying puts on UVXY ? I think that was the trade you described... does that strategy still make sense, or does the rising VIX now make option premiums too expensive. I realize that intrinsic value of those UVXY puts will rise as volatility subsides.


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## andrewf (Mar 1, 2010)

UVXY puts are (unsurprisingly) very expensive right now. If they were cheap I would have backed up the truck. This is why I really like this trade. Basically buy UVXY puts in normal times with relatively low IV, then when a crisis happens and the underlying price moves against you, IV spikes and your option value is well cushioned. I am actually impressed at how well my position fared (better than expected). I am very close to my all-time high on the option despite UVXY tripling and now still being over 2x the trough. And the position was down a bit on what I paid in July or August, so I could have entered even lower.


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## james4beach (Nov 15, 2012)

I'm fascinated by your idea. Do you use LEAPS?

Kind of funny... you're taking a derivative (put) position on a derivative (UVXY) of a derivative (VIX futures) of a derivative (VIX). But I agree that this seems like a relatively safe way to play in volatility. By being long options you have limited loss and the options are exchange cleared.


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## andrewf (Mar 1, 2010)

Yes. I have Jan '19 puts, bought last June. I'm keeping an eye on the '20 puts to roll out.


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## james4beach (Nov 15, 2012)

Just a heads-up to anyone tempted to trade SVXY or its options. Today, the issuer changed the policy of both SVXY and UVXY to be 1/2 exposure instead of 1x

http://www.proshares.com/news/prosh...ns_to_reduce_target_exposure_on_two_etfs.html


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## andrewf (Mar 1, 2010)

Uvxy is changed to 1.5x, not 0.5x.

As a short, I'm not pleased, but that also means it is likely the right call.


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## james4beach (Nov 15, 2012)

Oh right, UVXY had a different level. So that one was 2x, now 1.5x. Thanks for the correction.

I understand their motivation though. This change will make SVXY less exciting, and help it survive.

Looks like SVXY net assets is up to $719 million... amazing how money is pouring back into this!


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