At the request of Schizo, and others that enjoy my UVXY Valuation report, I have updated it today.
Since we have alot of new investors, let me explain this report.
UVXY is a two times leveraged ETF. It holds front end and second end VIX FutureContracts (not the SPOT VIX or the S & P Index). Each day, it sells some of the front end futures and buy the second month futures. Since the second month futures are higher than the front end futures, we are in a state that is called Contango (if the opposite was true and front end futures were higher than second month futures, then we would be in a state called Backwardation). Because of this Contango effect the Net asset Value (NAV) will drop each day based on this roll (assuming all future prces remained constant for that day- which does not happen, but this is for illustration purposes.
You can find the SPOT VIX price, asell as the VIX Futures on the CBOE website. Yesterdays close was:
$12.70 for Spot VIX
$14.19 for VIX April Futures
$15.56 for VIX May futures.
The actual holdings of UVXY was:
April future contracts of 29,637
May VIX future contracts of 17,272
Total VIX future contracts owned 46,909
Future expiration is Tuesday April 16th and buy the close of that business day, this fund will no longer have any April future contracts but hold 100% of May VIX FUture contracts. Thus, each day starting Monday, they will need to sell about 2,470 April Future contracts (29,637 April Future contracts divided by 12 trading days) and use the proceeds to buy May future contracts (since the May future contracts are about 9.65% higher than April (Contango), this selling and buying will lose about 2600 contracts in the fund (effect of Contango).
Now, at yesterdays close, the fund had 45,458 million units outstanding and the net asset value was $7.58.
This net asset value refelcts an AVERAGE Future price of $14.71. This can be calculated by
29,637/ 46,909 X$14.19= $8.97
17,272/ 46,909 X $15.56= $5.73
Total average VIX Future $14.71
Ralph, that's a great breakdown of the VIX. Question is how accurate you can be on future trades based on history. Are you able to be successful only in longer term vix trades or can you narrow down something like happened today (up then sharp down)? I imagine it is like EW theory and you look at past performance to predict a longer term trend. Ie, now the NAV looks to tell you to short the vix (I think). Does any of that make sense? I think that since this is not a stock and trades from formulations that there could be a "cheat" of sorts that gives us an edge. Of course just going short vix for a year and you win...yet none of us do that:)
In my analysis, I am not predicting what the vix futures should be at, but just what NAV would be if the vix futures were at a certain price.
VIX Futures can change based on macro economic sentiment, would political situations (N Korea, Europe), or Political situations (Debt ceiling, sequestation).
For me, I personally trade in two ways:
1. The first trade I do is a very short term trade (may be day trade). I look for a spike in UVXY and the market in the opposite side and then look to see if the market is reversing the initial spike, along with the spot vix and UVXY. Today was a prime example of this. The market hit its low at the opening, and also at 10.00 and then started its recover. UVXY followed by hitting its top and then retreating. Identifying these trends allows me to buy options in the new direction and make money on that day. I try to make between 25-50 cents per option contract on these trades. This may net me 20-30% gain on the options (for aday or two trade) and builds up my cash. This is where some people talk about recycling (washing) their trade (start, rinse, close and wait for the next opportunity). I did one of these trades on Friday.
2. I identify when a crisis occurs, anticipate when it will be resolved and then calculate what the NAV of UVXY will be if the future VIX drops in price. Thiese are longer term trades and are extremely profitable when they occur. Think the debt crisis in December and see how high the spot vix (and the futures) got and then look how fast it dropped.
These are my own personal trading strategies and are not intended for anyones recommendation to follow. Please do your own due diligence and I wish you the best.
Now, lets look at what the NAV would be at differeent points based on the AVERAGE net asset value, as well as the contracts owned as of today:
Averaged VIX Futures of $14- NAV would be $6.84
Averaged VIX Futures of $15- NAV would be $7.87
Thus, you can see for every dollar that the average VIX futures change, UVXY will change by $1 also
Finally, the above calculations were based on the VIX future holdings as of today. As mentioned in my other message, the number of contracts will drop by about 2,600 if Contango stays at its current level. This reduction in contracts outstanding means a further reduction in UVXY stock price of about 80 cents from today to futures espiration date.
Personally, with CYPRESS out of the way and based on my technical reading of the S & P 500 I believe that the SPOT VIX and the futures will remain low for the next two weeks. I see us near the $6 level by future expiration. This does not mean that I see a drop in UVXY each day, as their will be good trading days for each side, but is my own personal beliefs of where we are headed.
This is not a recommendation for anyone to trade the same way I am trading and each person should do their own due diligence and trade accordingly.
Good luck all and Happy Easter!!!
Just to update this from last week:
According to Proshares website, the average future contract value they now own is worth $15.07
Based on my calculations last week, the 7 cent increase of the Average VIX Futures at $15 would have brought the NAV to $7.92.
Contango was at about 80 cents (or about 7 cents for each trading day). You update this for 5 trading days for this past week and you get a drop of 35 cents.
So, NAV based on my above calculations would be $7.87 plus 7 cent increase (due to change in Average Futures from $15 to $15.07) less 35 cents for contango for one week or approximately $7.59
Proshares official calcultaions show NAV at $7.58
We now have about 45 cents left of contago. If VIX Futures stay at $15.07, then at future expiration we should expect the NAV to be about $7.13
It sure was an interesting trading week last week.
Hope both the bulls and bears made profits and locked them in.
Have a great weekend!!!
Thanks for the informative post. The only question I have is what would put us into backwardation? And...could we go from contango to backwardation quickly...or do the futures give you an indication that allows prediction of future backwardation. Sorry if this question is simple, but I have much to learn. I have not been following vol ETF's very long, but have not seen future VIX lower than current VIX. When that happens...is that considered backwardation?
Thanks for the great detailed explanation of UVXY. I'm curious of one thing. Who owns this ETF? Is it operated by a private company or is this something owned by NYSE or NAS? When I buy or sell, am I making trades with another trader(s) or am I dealing with the owner of the ETF?