UVXY Reverse Split Number 7—January 12, 2017


Updated: Mar 12th, 2017 | Vance Harwood | @6_Figure_Invest

ProShares will reverse split UVXY for the seventh time on January 12, 2017. According to their press release it will be a 5:1 reverse split, the same ratio as the previous July 2016 reverse split. High contango levels for most of 2016 have ravaged UVXY, putting it on a course to need reverse splitting in the shortest time since 2012.

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 0.004 cents.

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 funds reverse split about every 6 to 16 months.

UVXY Reverse Split History

6

Event Dates Split Ratio Inception / close price right before reverse split (split adjusted)  Months since inception /last split
Inception 3-Oct-2011 40 (2,400,000)
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 ~8 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 5X fewer shares that are worth 5X more each (assuming a reverse split ratio of 5:1).   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 20.  The option chains don’t adjust the strikes and the underlying symbol changes to UVXY3—which is 20% 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 reestablishing 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 SVXY’s 1:2 split for an example.  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

UVXY-June2016

For more on UVXY see:

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Sunday, March 12th, 2017 | Vance Harwood
  • Andrew_notPorC

    Boy am I glad I didn’t hold any UVXY options into the 1/24 expiry. My brokerage was a mess, showing no bid on my puts (for later expiries). I’ll keep this in a mind and be sure to close positions before reverse splits if I have an option expiring shortly thereafter.

  • Hi Andrew, Yes, when I was looking at it last night it looked tailor made to screw up broker software. It certainly hurt my head. The SVXY split adjusted the contract multiplier and the strikes–it looked very reasonable. Any ideas why the reverse split was handled differently?

  • Andrew_notPorC

    I’m not sure why they decided to handle the split this way. My brokerage seems to be handling it properly now. It was a bit of a wake up call on Friday to see that I probably would have had to phone in the order if I had to close a position then. I would hope they don’t schedule a reverse split around the time of the monthly option expiration.

  • I think I figured it out. Using the basic approach used for regular splits for reverse splits would sometimes result in fractional contracts, which would be unacceptable.

  • Alien BrAinZ

    Split Bitch!!! $UVXY

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  • Marko

    Hi Vance, you mentioned that in the past year erosion due to contango has slowed to 60%. Any idea what sort of market conditions are causing the slowdown, and whether the decay rate should continue to slow, or rebound to the rates of past years?

  • Sean Mastro

    Everywhere I have gone to read about UVXY reverse split, “they” all say, “The Options Clearing Corporation adjusts for the reverse split by changing the number of shares per contract from usual 100 to 20” Nothing to Worry about. Everything is still Equal.

    Im sorry but everything has changed. No one will trade Non-Standard lot Contracts of 20 instead of standard contracts of 100. Essential your up front cost basis has now been 95% guaranteed lost because you have been knocked out of the market you thought you were in in the first place.

    This is what has changed, and all things will not be equal when a stock splits or reverse splits, for option contracts…and strangely enough, it translates into options for a loss by Market Ejection, more than, the normal arena of win/loose by Price declination or promotion.

    A buyer has know way to pinpoint exactly when a split might happen, if it all, is still in question as well. If The Clearing House Corporation thinks the Option Contracts retain “of equal value” after a split, and are OK creating a non standard product after the fact, then The Clearing House Corporation is a participant in unfair business practices and should be investigated further.

    If Option Trading is a Zero Sum Game, and Volume diminishes to near zero on the thousands of adjusted options contracts that are now, non standard, and no one wants to participate in a market for them, thus rendering them ill-liquid, is that a fair market to the purchasers of the contracts in the first place looking for a market?

    Last Question….so where, or who, does all that money go to??? Follow the Money….Truth be Told.

  • Hi Sean,
    Can you give me a specific example? Looking at the adj option chains there is volume and bid / ask spreads that look functional. I don’t doubt that the liquidity has dropped dramatically, but are the spreads that far out of line?

    — Vance

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  • Iyad Abbas

    So will UVXY and VXX will they just be able to continue to reverse split forever? (I assume they are trying to keep the price in a certain range) Is there some sort of limit or wall that they will run into eventually and force them to stop?

  • Hi Iyad, No, no limit. They can keep doing this indefinitely.

    — Vance

  • The R

    Look at the pricing on some of these NS contracts. It looks like if you buy them with a view to exercising them into UVXY common you get a pretty steep discount on the time value. Or am I totally missing something?

  • Hi, Don’t know what “NS” is, near strike? Very much doubt a good discount, could you give specific exp date, strike, price?

    — Vance

  • The R

    Sorry about that Vance. “Non-Standard”. Look at 16 Jan 20 2017 UVXY Non Standard, 20 Share Contracts. They trade at .65. Yeah you have to buy 5x more but that is a huge discount to the Standard Contract premium of 6.20

  • ben

    hypothetically, lets say I could see the future and knew that over the next year or 2 we’d see an ’08 like crash in the markets, if not, worse. would UVXY be a good buy or is there a better option. I know it seems like a ridiculous question and ive read some of your posts about UVXY being bad in the long run. but would it work in this hypothetical scenario? if im looking to “win the lottery” (as i believe you put it). is there another option that could provide me with that level of return without the steady decrease in value?

  • tim

    Yes, during the August flash crash a few months ago UVXY went from in the low 20’s to 87 in less than 2 weeks. When people sell in a panic, volatility is a good place to be positioned.

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  • DougT22

    Making uvxy2 20% of uvxy in terms of strike price means a a $10 option that was 4 dollars off the money before the split is now 20 dollars out of the money. This is the position I am in. How on earth can that be fair? How can uvxy moving from $4 to $10 be the same as it now moving from $30 to $50. How can no one have started a class action suite against the clearing house for these kinds of practises? Or am I misunderstanding something?

  • Hi Doug,
    The key is to view things in terms of percentages, not absolute dollars. Is a $0.1 move in a $10 stock any more likely (or lucrative) than a $1 move in a $100 stock? The same for UVXY, a $20 move on a stock priced at $30 is just as likely as a $4 move on a $6 stock–both 67% moves. One apparent math error in your comment, I think your “$4 to $10” comparison should be $6 to $10.

    Vance

  • DougT22

    Thanks for the reply and the math correction Vance. I did start to think that way myself but then I looked at the $30 price of UVXY and if I were buying I would go for a $35 option. I have a hard time believing that the option calls for $50 are going to be trading for the $.35 that the 10 calls were trading for prior to the split, but my system can’t pull up any quotes for the new or old options right now.

  • Offhand I’d guess they would be trading at around 1.75 because the notional value is 5X higher. 100 shares worth ~ $3K vs $600 before.

  • Dinesh Patro

    When do I get the cash payout ?

  • I’m guessing the payout on the fractional shares will be on the 28th or 29th. It won’t be much, maximum payout will be around $25.

  • rttrader12

    Vance – Happy holidays and thanks for the post. I had a few questions here: 1. UVXY has had only reverse splits thus far. So how do I explain strike prices such as 1.5/2.5/3.5/…in the Jan’17 option series? I understood from your post that the strikes remain unadjusted when there are reverse splits. Did the market maker introduce these fractional strikes for some other reason?
    And 2. It’s only logical to me that, starting from the day after the reverse split, any options trader looking to open new positions would want to trade standard contracts that control 100 shares. Does that not naturally mean that the liquidity of the old series will be limited?
    3. How exactly would I pull up the old option series on my broker platform (options house in this case)? I tried UVXY2 and UVXY1 and had no luck.

    Thanks again for all the valuable info.

  • Hi rttrader,
    Regarding the fractional strikes, for a series like this that’s be around a long time the market makers will sometimes create options that are far out of the money, SPX for example has strikes down to 100 on some series. Some possible uses for these options might be their IV and gamma characteristics–which tend to be pretty interesting for institutional traders. The fractional strikes are probably just to give finer resolution–the percentage difference between 1 and 2 is pretty big.
    You are correct, the volume on the adjusted options is low and their bid / ask spreads are wide. Liquidity is probably ok, because the market makers are typically the primary source of liquidity anyway, but they won’t be giving any bargains. The longs still have the right to exercise, which keeps the market makers sort of honest, and the shorts can just wait until expiration to guarantee a fair price.
    Regarding the chains for adjusted options, all the ones I’ve seen are listed under the primary ticker (e.g, UVXY). There’s usually an option to turn on visibility of adjusted options somewhere. You might have to give your broker a call if you can’t find it;

  • Simon D.

    Wanted to note something – you said there is no material impact – I had a UVXY position when last reverse split happened and I got charged $20 by Scottrade for “PROSHARES ULTRA VIX ST 2X Reorg Fee”

  • Simon D.

    Just so happened that I had both a short and a long position and got charged $20 for each.