$VXST and UVXY Are Quite Low

By Lawrence G. McMillan

This article was originally featured in the 5/27/16 edition of The Option Strategist Newsletter.

As you can see from the right, $VXST (the CBOE’s short-term volatility index) is approaching 10. That seems incredibly low, and one would naturally think that it is a warning sign. But the $VXST chart of past two years (below) shows that it’s been at this level a lot – just not since August of 2015.

So, it’s really just like $VIX – not a problem until it begins to rise. A related chart is that of UVXY – one of the “double $VIX” ETF’s. This is now approaching 10 as well. However, it suffers from the same maladies as VXX – it loses value daily when the term structure is positive (and loses especially fast when the term structure is as steep as it is right now). However, one would have to think that a purchase of UVXY is warranted somewhere along the line.Even its options are trading in a relatively low percentile of implied volatility (36th). This ETF is subject to reverse splits, which just elevates it to levels from which it can decline steadily again. The last two reverse splits were in January 2014 and May 2015, so another one is probably not far off. The UVXY chart below does not contain a period of reverse splits, so you can see the power of this ETF on the upside, when the market makes a sharp break like it did in August 2015 or even in January of this year. But had you bought in February 2015 – just six months before the August debacle, you would probably have lost money on UVXY. It’s split adjusted low price in February 2015 was 85. It declined to 24 or so before rallying to 92 for one day in August 2015. So, a buy and hold here is very costly. One needs to time it better than that.

This article was originally featured in the 5/27/16 edition of The Option Strategist Newsletter. Receive the feature articles immidiately each week by subscribing now.