SVXY is a popular choice for those who want a risk defined way to short volatility and retain unlimited upside potential. But just like every other strategy, this risk reduction comes at the cost of reward potential (that darned Captial Markets Theory again)

The main problem in choosing SVXY over UVXY or even VXX, is beta slippage. Vol drag has a very real effect on all levered funds and is only exaggerated by the high realized volatility in these ETPs. Your gains in SVXY when volatility is contracting never seem to live up to your expectations, and the losses when volatility spikes cut even deeper than feared. But if you accept and are comfortable with these realities, then SVXY could still be a workable option.

A quick demonstration of this can be found by looking at the relative performance of SVXY and UVXY since Jan 2020. As of Feb 2022, SVXY still need to climb 25% to reach its pre-covid peak ($69 pre-covid, $56 today), yet UVXY is down 85% over the same timeframe ($104 pre-covid, $15 today) Obviously a long term holder of SVXY is still feeling the wounds caused almost 2 years prior whereas the UVXY shorter continues to pocket gains (provided the shorter survived March 2020)

When SVXY had its original –1x leverage, I would sell naked, DOTM Puts to grab the high premiums caused by skew (the same skew the OTM UVXY Calls carry in relation to their Put counterparts) The benefit being that SVXY can only go to $0 so the risk is limited to a degree. With the current -.5x leverage, it would take a 200% one day move in the benchmark to take SVXY to $0

Given this reality, there could be some pairs trade where one might be able to construct a position that pits the beta slippage of one against the other and maintain some sort of delta neutral exposure?

The best analogy I’ve come up with to try to illustrate the issues with going long SVXY goes like this:

• Beta slippage for SVXY is like climbing a loose gravel hill where you are always sliding down on your way up, slowing your progress
• Beta slippage for UVXY is like climbing down that same loose gravel hill where you are sliding down even faster than you’re are walking