ProShares reverse split UVXY for the eighth time on July 17, 2017 (press release). Unlike the previous 3 reverse splits, this one will be a 4:1 reverse split. The reason for the different ratio is probably because of old, but not yet expired UVXY options, with a 4:1 split they don’t have to be cashed out—with a typical 5:1 split they would only control a fraction of a share, which isn’t supported. TVIX, it’s 2x long competitor from VelocityShares did a 10:1 reverse split not too long ago—at least it has a chance to go a year before another reverse split is needed.
The 2X leveraged short-term volatility ETPs: ProShares’ UVXY and VelocityShares’ TVIX must frequently reverse split to keep their prices in a reasonable trading range—otherwise, their share prices would rapidly approach zero. For example, an original share of UVXY purchased for $40 at the fund inception in 2011 would now be worth less than 0.0001 cents. High contango levels for most of 2017 have ravaged UVXY, requiring a reverse split in near record time.
For a discussion of what causes this ruinous price erosion see “How Does UVXY Work?” Lacking bear markets these funds are ravaged by contango at rates that vary between 70% and 90% per year. Monthly decay rates run in the 10% to 25% range. See this post for a chart showing how those decay rates have changed over time.
Historically these 2X leveraged volatility funds reverse split about every 6 to 16 months.
UVXY Reverse Split History
|Event||Dates||Split Ratio||Inception / close price right before reverse split (split adjusted)||Months since inception /last split|
|1st Rev. Split||8-Mar-2012||6:1||5.58||5|
|2nd Rev. Split||7-Sep-2012||10:1||3.92||6|
|3rd Rev. Split||10-Jun-2013||10:1||6.25||9|
|4th Rev. Split||24-Jan-2014||4:1||15.48||7|
|5th Rev. Split||20-May-2015||5:1||8.19||16|
|6th Rev. Split||25-July-2016||5:1||6.01||14|
|7th Rev. Split||12-Jan-2017||5:1||6.12||6|
|8th Rev. Split||17-Jul-2017||4:1||8.56||6|
If you hold shares of UVXY there isn’t anything to worry about when it reverse splits. The value of your investment stays the same through the reverse split process. You just have 4X fewer shares that are worth 4X more each (assuming a reverse split ratio of 4:1). If your share holdings are not a multiple of four, say 215 shares, you will get 53 reverse adjusted shares and a cash payout for the 3 remaining pre-split shares.
If you are short UVXY, same story, no material impact.
If you were holding UVXY options (long or short) when the reverse split occurred there’s still no material impact, however, the option chains are going to hurt your head for a while. The Options Clearing Corporation adjusts for the reverse split by changing the number of shares per contract from usual 100 to 25. The option chains don’t adjust the strikes and the underlying symbol changes to UVXY3—which is 25% of UVXY’s price. New options will be generated with UVXY as the underlying, but the old adjusted options will hang around until they expire. I’ve seen reports that the liquidity on the adjusted options is not good, so if you are planning on exiting your options, rather than just letting them expire you should consider closing out your positions and re-establishing them after the split.
For regular, forward splits things are more straightforward —the strike price of the options are divided by the split ratio, and the number of contracts is multiplied by the split ratio. See the OCC memo on a previous SVXY’s 1:2 split for an example (SVXY will do another 1:2 split 14-July-17). This basic approach can’t be used on reverse splits (multiply the strike price and divide the number of contacts by the split ratio) because depending on the number of contracts held some customers would end up with fractional contracts—which is a no go.
The chart below uses my simulated data plus actuals to show UVXY’s price history since 2004
- Is Shorting UVXY, TVIX, or VXX the Perfect Trade?
- How Does UVXY Work?
- Backtests for Popular Long & Short Volatility Exchange Traded Products
- Sometimes Inverse / Leveraged Volatility Funds Outperform Their Leverage Factors
- Options on 2X and Inverse Volatility
Saturday, September 16th, 2017 | Vance Harwood