UVXY Spikes are Sexy

I completely understand the lure of going long UVXY. By design it’s a loaded gun ready to explode with market crashes. What’s not to like about the chance to make 5, 10, even 100 times your money on a quick trade? Just buy some out of the money Calls just before the crash and retire early!

Buying Calls has limited risk and buying shares is quick to enter and exit, so what could possibly go wrong? Simply load up and wait for the market crash you are sure is just around the corner.

The problem here it two-fold

  • The flip side of side of UVXY’s loaded gun reality is an extreme high cost to carry through daily futures rolls in contango and the grinding effects of beta slippage. This makes getting timing wrong, even if a crash eventually comes, your Achilles heal. The ‘when’ a crash happens is just as important as ‘if’ one happens.
  • Timing a market crash is elusive. The market is priced where it thinks it should be through the process of buyer and sellers agreeing on price. Predicting an extreme move means that you think you ‘know’ something they don’t. The moment crash causing news hits the wires, prices have already changed to reflect the new reality.

Many who open long UVXY positions fail to account for how much price will decay before their predicted event happens. If you buy at $20, but it drops to $10 just before spiking 100% back to $20, you were right on the event but very wrong on the trade.

How do I go long UVXY sucessfully?

Just as the passing of time is a short sellers friend, that passing time is your enemy. So unless you have perfect timing, it is imperative that you address the costs of going longs through trade construction OR by limiting time you expose yourself to the trade.

A more reliable way is simple trend following and only enter when a market correction is afoot. However even here you need to be correct that the move will continue as a rally or bounce can turn your entry into a big loss in quick fashion.

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