I’m estimating that ProShares will reverse split UVXY 5:1 for the tenth time around May 11th, 2020. I’m basing this forecast on UVXY’s recent decay rate of around 11% per month and the price trigger point that spurs ProShares to take action of $8 per share. Sometimes ProShares will do a 4:1 split because of issues with adjusted options, but this time 5:1 works fine and that seems to be ProShares’ preferred choice.
Because of the dramatic volatility swing on February 5th, 2018 Proshares decided to reduce the leverage on UVXY from 2X to 1.5X. This will reduce UVXY’s performance during volatility spikes but it will also reduce its decay rate when volatility is subdued. My simulations indicate that UVXY’s average annual decay rate will drop from around -82% a year to -68% a year. This doesn’t seem like a lot but in practice, it will be significantly stretch out the time between reverse splits. If my estimate is correct UVXY will have gone 20 months since it last reverse split in September, 2018 compared to 17 months for its 2X competitor TVIX (and TVIX typically does 10:1 reverse splits not 5:1).
Proshares’ 1.5X leveraged short-term volatility ETP, UVXY, must frequently reverse split to keep their prices in a reasonable trading range—otherwise, its share price 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.
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 50% and 75% per year. Monthly decay rates run in the 7% to 18% range. See this post for a chart showing how those decay rates have changed over time.
From my simulations, 1.5X leveraged volatility funds will reverse split about every 8 to 22 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|
|Leverage Shift from 2X to 1.5X||28-Feb-2018|
|9th Rev. Split||18-Sept-2018||5:1||7.36||14|
|10th Rev. Split||11-May-2020 (estimate)||5:1 (est.)||~8||20|
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 however your broker may charge some fees, e.g., $20 “Reorg Fee”. 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 five, say 213 shares, you will get 42 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 (for a 5:1 reverse split). 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 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 did a 1:2 split on 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 to show what 1.5X UVXY & 2X UVXY prices would have been starting in 2004