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Frequently Asked Questions

Dr K VIX Volatility Model
Do you ever short UVXY, as a 2x version of XIV? If not, why? What about buying a 2x XIV if it existed?

Q: Do you ever short UVXY, as a 2x version of XIV? If not, why?

Great question. It's a matter of the black swan. If the market were to have a huge gap lower overnight, UVXY would skyrocket, much as it did in August 2015. If one were to have been short UVXY, that one day loss would have been massive. Meanwhile, the VIX Volatility Model was long UVXY after the beta tests were completed and the VIX Spiking Strategy was added. This resulted in a massive profit.

While such big down days are highly improbable, they are not impossible.

Thus while UVXY tends to trend lower MOST of the time, and while this may make shorting UVXY very tempting to short, there may be that one black swan day where it gaps higher by a huge amount.

And keep in mind that the market's action in August 2015 could have been much worse had the news been a lot more dire.

Q: What about buying a 2x XIV if it existed?

If there were a 2x version of XIV, it would be unwise to trade it with a 100% (no margin) position since markets can melt down overnight, rather than ever melt up. At least that's what 100+ years of data history have shown. Thus if one were 100% long a 2x XIV and the market gapped down by even 10-15% overnight (hugely unlikely but it could happen), they may be wiped out. For this reason, it is unwise to short UVXY even though it looks seductive given its tendency to downtrend. Note that on the Dow's worst days, its gaps lower such as in 1929, 1987, 2008, and 2010 were less than 10%. It was after the open that the market continued lower in a fierce manner.

I have taken extreme pains to keep VVM beyond 6-sigma robust. Thus while UVXY can gap lower overnight as shown by the near record one-day move/gap lower on the VIX on April 24, 2017, it is still within the performance expectations of VVM, black swans and all.

Market downturns are typically much faster overall than uptrends. The saying stocks take the stairs up and the elevator down also applies to markets.


Published: Mar 22 2017, Modified: May 1 2017