Derivative Inflows

Often I see traders look at UVXY’s or other vol tickers’ inflows to highlight the obvious ‘accumulation’ phase that indicates price support and higher prices. What they typically fail to account for is the change in spot price over their chosen measurement period.

UVXY is an ever declining ticker with brief, and violent, spikes to the upside. This declining nature means that it will take more shares at $10 to do the work of shares at $40.

Notional Value is key

To help clear this up, chart the historical shares outstanding and multiply that by volume. A historical AUM or MarketCap chart would show the same thing. While this notional value does fluctuate, the data these traders point to focuses on share count, not dollar value. As UVXY moves on a percentage basis of it’s daily benchmark’s moves, no one cares where it is priced, a 5% move from $10 produces the same profit as a 5% move from $40 when the total dollars at risk are equal.

Volume Charts are rarely better

While there are obvious UVXY volume increases during spikes, for longer term studies, these will be equally distorted.

A portfolio manager who wants to protect their book will look to buy insurance (perhaps UVXY) to cover perceived risk. Their calculations will determine the size of UVXY position to take, and its price will determine how many shares to buy.

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