Does anyone remember if the last reverse split for UVXY had any effect upon the time premium portion of the options? Since the volume for the adjusted options after the split will drop substantially, one of the problems will be a wide bid/ask spread. I am thinking that just the announcement of a reverse split may have an adverse effect upon the time premium since everyone will immediately begin to close out their options prior to the actual date of the reverse split.
Another issue is the possibility of UVXY being closed down. If this were to happen, OTM options would become worthless. I currently have some OTM Jan 2015 puts. I am thinking of hedging my long puts by selling OTM Jan 2015 calls. Not an ideal hedge, but at least this will protect me in the event that UVXY is closed down.
This is a cash cow for proshares. I doubt they'll shut it down anytime soon. Look at TVIX. How many times that thing was under $2 and reversed split. I lost count. On the other hand, in case of a swan event, if VIX doubles over night, proshares wil surely shut down SVXY. It's in the SVXY prospectus.
Here are some relevant comments from the Six Figure Investing site regarding XIV:
"With XIV termination (or “acceleration” in marketing speak) relates to daily percentage moves. If VXX jumped more than 100% in a day, then if VelocityShares didn’t terminate XIV its notational value could go to zero. They avoid this particular unhappy situation by terminating the fund if the daily move of VXX is 80% or more—although losing 80% in one day would still be plenty traumatic.
The termination risk for XIV appears to be limited to market crashes worse than the Flash crash. Two examples that come to mind are the 2009 crash and the October 1987 crash. VXX didn’t exist for either of these. I have analyzed VIX data (or simulated data) since 1992—there were 20 days with VIX jumping over 30% (previous day close to intraday high) during that period. The highest percentage jump over that period was 70.5% on February 27, 2007. There were three days with VIX jumps over 30% in the 2008/2009 crash, and during the Flash Crash.
If VXX had existed during this time span, and held to its typical behavior of 50% of VIX’s move it looks like the XIV termination event would not have occurred, but obviously it would have taken heavy losses on those days."
"Another issue is the possibility of UVXY being closed down. If this were to happen, OTM options would become worthless. I currently have some OTM Jan 2015 puts. I am thinking of hedging my long puts by selling OTM Jan 2015 calls. Not an ideal hedge, but at least this will protect me in the event that UVXY is closed down."
I believe that your assumptions are incorrect.
Options are a contract between the writer of the option and its buyer. Exercising that contract is NOT, I believe, contingent upon the underlying security being actively traded.
In other words, if you own UVXY Jan 2015 $8 puts and UVXY stops trading, the seller of your put, again to the best of my knowledge, if you wish to exercise, is still obliged to purchase X number of shares of worthless shares of UVXY from you for 8 bucks a share... Unfortunately you would lose your theta premium.
Yes, it would be profitable to exercise my long put options as long as they were in the money. However, there is always the possibility that a ETF could shut down while still having some remaining value to the shares. In this case, all ITM options would be settled for their intrinsic value, while all OTM options would become worthless. Since the net assets of UVXY is so high, there is little chance that this ETF would ever shut down.
I often wonder what the probability of UVXY being closed is. I certainly have been giving me money. I have only been trading it in this current market type environment and have not experienced any true bear market while trading volatility but do remember watching VIX during the Summer of 2011.
The probability of Uvxy being closed is less than 10%. I don't see how uvxy is going drop 80% or more in one day. I have been trading these products since July 2011, and yeah tvix went up more than 600% from July 2011 to October 4, 2011. A lot of shorts got killed back then!!.