I used to think shorting the UVXY was almost like free money. ***It looses like 95% of its value a year dudes!!!!***. But then I felt one of its MASSIVE spikes with the COVID in early 2020, and decided to do some comparisons. So since UVXY started on 10/4/11, I did a SPY spreadsheet where one just put in 100% of its account balance on 10/4/11 and let it ride in SPY. As of 5/7/21 a $100 account balance would have risen to $453.41. That is a roughly 17.06% IRR. The maximum drawdown was 33.72%. That sounds killer. Then I did a UVXY spreadsheet, again starting 10/4/11, and made my amount of UVXY shorted in the market X percent of portfolio value (as it changes over time). So if my shorted UVXY drops below this percent (as it does on the vast majority of days), I would short more to get it back up to that X percent. So then I fiddled with the X percent until I got the same 17.06% IRR as I did with my SPY holdings. And you know at that 17.06% IRR what my max drawdown was? 83.5%. WOW. Way, way worse than just buying and holding SPY. Then I did the same shorting spreadsheet with SDS that I did with UVXY. Fiddling around until I got the same 17.06%, I got a max drawdown of 36.73%. Not too much worse than just holding the SPY itself, but still worse. However, in addition, neither this one nor the UVXY test takes into account the short interest payments you'll have to make each day on your started shares. I'm going to test a million different things to come, but the moral of the story: SPY, you are looking as sexy as ever, I want to hold you for eternity. Hope some people get some value out of this, any thoughts/ideas welcome, especially as to things to test (that I can on an excel platform).
UVXY by design loses value over time. This was a popular strategy for many until the day XIV folded.SVXY lost significantly and had to change leverage. Then some folks learnt that drawdown can be brutal. Some still don't feel that way. A better alternative is to short uvxy after vix futures raise to ride the mean reversion wave. Long uvxy is a fools errand and sensible short of uvxy is a viable plan. If you started scaling into svxy on Wednesday you wd have been up $5 for each svxy holding by Friday. It is also interesting to see many that don't get that uvxy is tied to vix futures and not vix. It is too risky to stay shorted all the time but that's subject to individual perceptions.
Very interesting how so few on here find these very interesting calculations. You'd think that shorting an ETF that losses like 90% a year (I forgot what the actual number is, but it looses HUGELY) would be so much better than simply buying and holding the SP500. But no, it gets CRUSHED on any kind of risk-reward equivalence setting. Not that many analytical people on this forum besides me, it seems....
Future tests might be.... stay X% in SPY, nothing else, until VIX hits [40], then put the remaining Y% to work shorting UVXY. See if by testing that can beat just buying and holding the SP500 100%. So many things to test.
Shorting volatility ETFs is a bad idea, especially if you aren't using any sort of market timing. It might be ok to short them if you've developed a system to identify volatility peaks. You definitely do not want to short them when volatility is at a relative low. If you want to short decaying ETFs, then short something like SQQQ or SPXU. These won't rally as much during bear markets because their movements are determined exclusively by the prices of the major indexes. Something I've explored is shorting leveraged index ETFs and going long on volatility ETFs. You can do this with options (sell calls on SQQQ, buy calls on VXX). From what I've seen, options on VXX seem to be cheap compared to options on SQQQ. Enter these trades at a net credit or zero cost so that you won't lose anything if the market keeps going up. IMO, this is a better hedge than buying puts or calls on volatility. A caveat: this strategy has worked in the past, but the market always changes. The biggest risk with this approach is if the market undergoes a relatively "calm" sell off that lasts for years.
The timing is built right in the futures when it moves into backwardation. Etfs like uvxy are based on futures. Contango, convergence of futures to spot near expiry and roll effect are the prime reasons why short volatility works. And there has been a few instances where it would act against expectation. Futures also trade at times when etfs can't be traded. Risk is exceptional.
"If you want to short decaying ETFs, then short something like SQQQ or SPXU. These won't rally as much during bear markets because their movements are determined exclusively by the prices of the major indexes." You mean kind of like shorting SDS, from my original post? But I'll add SQQQ and SPXU to the mix, as long as those are short leveraged ETFs. Because if they are long levered ETFs we all know shorting those will end in a symphony of destruction...