Short Squeeze

It’s natural to worry about external threats to shorting UVXY outside of VIX spikes causing the price to ramp. What if an organized group kept buying shares or Calls, raising the price and forcing shorts to cover which further adds to the buying pressure? Well, a short squeeze would become apparent when UVXY’s spot price rose significantly above UVXY.IV’s price (since you can’t squeeze a symbol that doesn’t have actual shares or even trades)
I’ve seen more than a couple of instances where Reddit posts call to target the shorts in the vol space to replicate a GME styled short squeeze, but I’m almost certain that would fail for many reasons:

  • Vol ETPs are not equites where supply is constrained. Their sponsors (I.e. Proshares) will create as many shares as demand requires. This means there is no real limit to the number of shares that can be on the market unlike GME where share counts are more difficult to increase.
  • Volatility is a massive complex of interrelated instruments that move in concert so the ability to move one without all the others is suspect at best
  • Squeezed shorts and Market Makers can hedge their risks in many other areas besides UVXY itself. They can use VIX options, VXX, VX futures and the like
  • If UVXY were to drift too far from its Intraday Value, a world of arbitrage opportunities would open up that would create new selling pressure from other participants. How about a VXX/UVXY pairs trade?
  • UVXY, like all calculated instruments, need constant reinforcement to maintain an elevated level. Any let up on the buying would send its value crashing back down to normal due to its derived nature. An equity can hang out at any level the market will allow
  • Lastly if a ramp in price caused the shorts to be squeezed, then surely a price spike of 200% or 1200% would cause the same, yet UVXY has never strayed significantly and sustainably from its Intraday Value during those past events

Those assurances aside, if a group was to force buying pressure on VX futures through some method, that was unmatched with willing VX sellers, a short squeeze could occur. But this would require a massive effort as it would not only cause UVXY to jump in price, but every other vol ETP as well reacting in concert (since they are tied to VX movements) It would also drag more distant VX months with it (M3 and later). The spread between spot VIX and VX30 would display an obvious divergence unseen before and the curve would jump into backwardation without the usual prerequisites.