Shorting from $2.4 billion to $10

(And from $40 to $2,400,000,000)

After backing out UVXY’s 10 reverse splits, the initial price at inception now stands at $2,4000,000,000 per share and that value will only increase with subsequent reverse splits.

If UVXY started at $40 in 2011 and is now worth .00000067, would it be possible that I could have made some or all of that $2,400,000,000 per share?

The answer is yes and here’s how!

The first key is understanding the profit potential between a long and a short position. Much like the beta slippage issue where the same percentage moves from different spot equaling different absolute values, as UVXY decays, a 80% yearly drop year after year will produce significantly less dollar profits without a critical adjustment:

Maintaining Notional Exposure

As your short keeps working in your favor, your notional exposure keeps shrinking. If you want a 10% drop in the underlying to mean a 10% gain for your net liq, your notional exposure has to equal that of your starting point. While this doesn’t mean you need to add more capital, it does mean you need to adjust your share count.

Let’s say that you start with 1 share @ $100 and it drops 50% in one day. Your notional exposure has dropped to $50 as well. If it drops 50% again the next day, the share price is now $25 but you only profited 25% more from your initial investment. In order to realize the full impact of day 2’s 50% drop, you’d need to restore your notional exposure by selling a second share (using the profits from day 1’s drop). If you restored your notional for each day a new ATL was printed then you could have turned $40 into $2,4000,000,000 over 10 years!

But here’s the rub (there’s always a rub)

Maintaining that constant notional exposure (and without an available hedge) you will be exposing yourself to the full extent of any spike that occurs. Not a problem for most if a 10x move comes along when you started with $40. But what can you do once your $40 notional becomes $400,000, or $40,000,000. Surviving a fully exposed 10x move becomes problematic.

The next issue is market size. Currently UVXY is worth about $500,000,000, so if you were successful with that $40, maintaining notional from inception, you’d now be the only player with 5x the shares that are currently out there. If you somehow managed to get this far, not only would the market need to be able to absorb the consequences of your UVXY position, but also that of any counter measures you needed to deploy. There’s a reason why Renaissance’s Medallion fund is capped at $1bn