How many times have you seen a trader predict that UVXY will go to $100, $500, or $1,000, no matter where is current price is or where VIX stands? As UVXY is a pure math equation, with a couple of assumptions, one can quickly calculate where its top might be.
The first thing we need to establish is how high can VIX go? Theoretically there’s no limit, but we trade markets that are mostly practical, even if sometimes irrational. VIX is the measure of implied volatility in SPX where a level just above 19 equals 1% daily moves in SPX. VIX at 200 equals daily move approaching 60% PER DAY. The fact remains that the modern VIX (the one used by VX traders and all vol ETPs) has never traded or closed above 90. It would be very low probability bet that VIX will ever crack 100 though it remains a possibility. That said we might use VIX 90 to determine how high UVXY to trade to.
The next part is understanding how VX futures trade in respect to VIX. The futures stay close, but rarely exceed a daily VIX move. In 2020 VIX traded to a high of 85.47 while VX only reached 80.85 (incidentally, the October 2008 VIX spiked to just over 89 but VX only to 69). But for this calculation, it would be fair to say that VX will trade at a 5% discount to VIX at its peak.
Now we take the percent change from the current VX30 to the projected max, multiply that time UVXY’s 1.5x leverage, and then apply that percent change to UVXY’s current spot. Using August 12, 2022 closing prices it would look like this:
VIX spikes to 90 so VX spikes to 85 (might be even lower than this depending on where in the VX expiration cycle we are and the degree of backwardation present) Current VX30 is 23.31, which needs a 3.65 spike to get to 85. 3.65*1.5(UVXY’s leverage)=5.475. UVXY’s spot is $9.11 so $9.11*5.475= $49.88 as a reasonable max price, but…
There are other factors like length of time in backwardation, that beta slippage can work in reverse and the aforementioned VX cycle timing.
Applying this calculation to 2020, VIX closed on February 17th at 17.08, VX closed at 17.05, and UVXY at $12.34 (prior to the last 1-for-10 reverse split). At the peak VIX reached 89.47, VX 80.85, and UVXY $135, so: VX 80.85/17.05 = 4.74, 4.74*1.5=7.11, 7.11*12.34 = $87.73. Where did the other $47 and 3.83% go? The difference lies in the 4 weeks it took to run from trough to peak. While backwardation didn’t start until a week later, 3 weeks worth of buying high and selling low had a major impact, plus the vol drag effect of applying smaller percent increases to ever rising numbers conspired to lift UVXY far beyond a one day max move calculation. While timing a spike proves difficult, accurately predicting the price path of these inputs would be next to impossible. One could make a study of significant trough to peak metrics, but there are too few occurrences to build confidence. But using 2020 as your guide, you might infer a max price that is 1.5x what the calculation here produces. Applying that to our 8/12/2022 example, UVXY max price would be $74.81 (5.475%*1.5=8.2% then 8.2*9.11=$74.81)