UVXY Reverse Split Number 9—September 18, 2018

ProShares reverse split UVXY for the ninth time on September 18, 2018, with a 5:1 reverse split (press release).  Sometimes ProShares will do a 4:1 split because of issues with adjusted options, but this time 5:1 worked well on that dimension.  Proshares also reverse split its inverse -0.5X fund SVXY, which is a bit of a surprise.  Perhaps they want to help people forget the 90% drawdown of February 5th, 2018.

Because of the dramatic volatility swings in February 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.

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. High contango levels for most of 2017 have ravaged UVXY setting up the need for another reverse split in 2018.

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

EventDatesSplit RatioInception / close price right before reverse split (split adjusted) Months since inception /last split
Inception3-Oct-2011$40 ($160,000,000)
1st Rev. Split8-Mar-20126:15.585
2nd Rev. Split7-Sep-201210:13.926
3rd Rev. Split10-Jun-201310:16.259
4th Rev. Split24-Jan-20144:115.487
5th Rev. Split20-May-20155:18.1916
6th Rev. Split25-July-20165:16.0114
7th Rev. Split12-Jan-20175:16.126
8th Rev. Split17-Jul-20174:18.566
Leverage Shift from 2X to 1.5X28-Feb-2018
9th Rev. Split18-Sept-20185:17.3614

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 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.  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



For more on UVXY see:


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54 thoughts on “UVXY Reverse Split Number 9—September 18, 2018”

  1. Hi Vance, Thanks for your insight and experience in this fascinating area. I’ve searched and can’t find info on this, but might have missed it.. I’m short jul 17 UXVY 9.50 puts [which now show up in optionsXpress as UXVY1]. The underlying displays as 30.93 which would seem to mean I’m safely OTM ! but as the price of the option has doubled you can understand that I’d like to get a better grip on what’s going on. The option chain in OX shows pricing for 9.50 and 9.50* the latter being the UVXY1 series. Can you help me find the real exposure which my 9.50put represents, please?

    • I’m also an OPEX customer (soon to be Schwab). Just keep in mind that the old options are now for UVXY1 and not UVXY and that the price of UVXY1 is simply .25 * UVXY.

  2. Question for the board. I sold two UVXY calls for $9.50 which at the time of the split were worth about $4.50. My P/L showed a $1000 gain. With the reverse split the options are $4.45 and my P/L shows $0.00.

    My understanding is that those calls now control 1/4 of the share but shouldn’t the P/L be the same? Or am I missing something.

    Thanks!

  3. Help! had UVYX puts, $8 strike with Sept 1 exp. before the reverse split… my brokerage says the new symbol for the option is UVXY1, but nothing comes back on that quote request? I also tried CBOE.com, and not recognized either? I’m concerned I am being taken advantage of based on liquidity. The new reverse split option should be tied (LOCKED) to some factor that of its current equal (after all, it has the same value at expiration ) Net, I want to simply get to a current equivalent trading put symbol with generally the same strike and expiration… any ideas/suggestions? Thank you in advance!!

    • Hi Paul,
      UVXY1 is just 25% of what UVXY is trading at. It might take a couple days but your options should show up in the “adjusted” options chains (make sure you’ve turned on the capability to see adjusted options). They will now control 25 shares of UVXY instead of the 100 you had before–so it all nets out the same as the reverse split. The bid/ask spreads will probably be quite wide but assuming you are long the options you can exercise your options if you can’t get a fair price from the market maker. It’s always fair game to do limit orders on options trades that are inside the bid / ask spread (start around mid way). If you exercise your options or if they are assigned your broker will transfer the requisite number of shares out of your account, so unless you want a short position you should be ready to buy shares right before the exercise or be ready to cover the short position. If you go the exercise/assignment route make sure you have the appropriate amount of buying power.

      Vance

  4. I have just started becoming interested in these concepts, and I find the whole reverse split thing stange. Is there not a limit to the number of times a stock can be reverse split? UVXY has done this 8 times already as of today. How much longer will UVXY be trading if it has to keep doing this?!

    • Hi Darren, There is no limit to number of reverse splits. As long as the fund has sufficient assets (it has around $385 million now) the issuer will continue reverse splitting it. It would have to drop below $50 million or less before ProShares would consider discontinuing it.

        • Hi Kevbo, The asset size is determined by how many people are willing to buy UVXY shares. When a fund starts there’s usually some seed money that is put in by the issuer (e.g, 20 million) , but after that it’s a process of how many people are buying UVXY shares vs number of people selling shares. If the demand is high enough that the market price is being driven higher than the value of the underlying asset then entities called authorized participates will go to the issuer (ProShares) in this case and give them money in exchange for shares to use in satisfying the demand.

          ETFDB.com is showing UVYX as having $400M in AUM, which is assets under management.

          Best Regards, Vance

          • Thanks for the answer again Vince. But, as so many people want to short UVXY, surely there is an inbalance that will result in more people selling than buying, thus driving down the asset size long-term? I may have this completely wrong……….

  5. I suspect that the July 17, 2017 reverse split is 4:1 because option contracts on lots of 100 shares expiring January 20, 2018 were available just before the last two 5:1 reverse splits, and this way those option contracts will be adjusted still to apply to a whole number of the new UVXY shares (100 / 5 / 5 / 4 = 1).

    • HI Adam, Very interesting. My first reaction is why ProShares would care, but having to cash out those options due to a fractional share count is going to make someone unhappy–maybe they leaned on ProShares… Thanks!

  6. Hello Vance,
    I have much respect for your knowledge sharing on this post in particular on UVXY options trading & its mechanics.

    I’d be grateful for your advice :-

    I have now several short call options on UVXY at strike prices ranging 28 – 30 expiring Dec 2017 and intend to hold them till expiry worthless. But with the reverse split that is forthcoming in 2 weeks time on 15 July 2017 and assuming the underlying price before split remains at $9+ , will I be in trouble with margin call or worse, be assigned in the shares, just so because the prices are being multipled from the current $9+ to become $9 X 4 = $36?

    Thank you.

    • Hi Coco,
      No need to worry. You’ll be fine. Your calls contracts will be adjusted (number of shares controlled per contract) such that their value does not change even with the new reverse split price.

    • I was also confused by this the first time I dealt with a UVXY split. I had conversations with my broker and in fact OCC and it still wasn’t clear. That was until I realized that the old options point to an underlying of UVXY1 *not* UVXY (after the split)! And the press release states in small letters that the price of UVXY1 is .25 times UVXY. Then the math all worked out.

  7. Vance I have a question about the section on Reverse splits for UVXY, if i own a 2 puts @ 7.00 when it reverse splits will i own a .4 puts @ 35.00, expiring i January 18, now if before it expires I buy from the market 40 UVXY will I be able to exercise my Puts ? what if I own 5 puts will it be 1 put of UVXY2 with very low liquidity?

    • Hi Himanshu, With a reverse split the number of option contracts doesn’t change, but the options refer to a different ticker (e.g., UVXY3) and the number of shares controlled will be 20 rather than a 100 (assuming a 5:1 reverse split). 40 shares of UVXY would be required to exercise your puts. If you have 5 puts now you will have 5 puts post split. Yes, liquidity will probably not be good.

  8. Hey Vance, I just was looking at all my short uvxy calls and thought a reverse split was coming soon. I googled it and found your post from last Friday. What a coincidence! My only comment on your post is that the illiquidity of the calls after the split is, in my mind at least, definitely material. You can’t get rid of them once the price adjusts. So I would say that’s material. Even though the split math supposedly protects the short seller, the market says, NO WAY. But you do acknowledge the illiquidity in your post. Happy trading…

  9. Hi Vance,

    I have been keeping up with this post for the past 6 months. I’m currently interested at looking at the old option chains prior to splits that are close to expiration. Do you know where I can view those? My current platform is eoption.

    • Hi Alex, As far as I know none of the brokers keeps their option chains around after the options expire. You would probably have to buy historical data in order to get that information.

      Vance

  10. 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”

  11. 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;

  12. 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

      • 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.

  13. 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?

    • 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.

  14. 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?

      • 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

  15. 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?

  16. 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

  17. 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?

  18. 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?

      • 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.

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