Playing Volatility Through UVXY As Stocks Sputter

Volatility is front and center in 2022. The CBOE Volatility Index (VIX) has stubbornly held near the 30-level throughout this year. For context, a VIX at 30 implies a roughly 2% daily swing up or down on the S&P 500.

VIX: Bouncing Around 30 in 2022

VIX: Long-Term Perspective

Still, many traders want to see a VIX spike to the 45-53 area to mark a true low in stocks. Consider that the average VIX reading since its creation in the early 1990s has been about 18-20 while spikes above 40 often market historical ends to stock market corrections. Notably, both 2008 and early 2020 featured VIX surges to above 80 – so nothing is out of the question.

VIX: Spikes to 45-53 Are Normal

UVXY: A Leveraged Bullish Bet on S&P 500 Volatility

One way to play short-term moves in S&P 500 volatility is through the ProShares Ultra VIX Short-Term Futures ETF (BATS:UVXY). According to ProShares, the ETF seeks daily investment results, before fees and expenses, that correspond to one and one-half times (1.5x) the daily performance of the S&P 500 VIX Short-Term Futures Index. UVXY is a leveraged ETF, so holding it for more than a few days runs the risk of losing out to negative compounding returns from volatility – long-term total returns are dreadful, per ProShares. The upshot is that returns are enhanced if you happen to nail a multi-week trend well.

Good Tracking Near-Term, Poor Long-Term Performance

UVXY: Long Track-Record, Great Liquidity

UVXY has been around since October 2011, features an expense ratio of 0.95%, and has a strong volume of nearly 80 million shares per day, according to ProShares. Year-to-date, the VIX index is up 71% while UVXY is up just 27%. Tracking between the two is quite close on the 3-month chart, though.

VIX and UVXY Tracking Tight Over the Last Three Months

UVXY and VXX are two of the most popular ways to go long volatility. It’s one of the few ETF niches that has performed well this year.

2022 ETF Performance Heat Map: Volatility a Winner

Waiting for the Spike

I continue to be in the camp that the market needs a real fear spike to mark a solid bottom in the S&P 500. That means the Volatility Index would have to soar above 45. Should that thesis happen, UVXY would certainly benefit. Also consider that stocks tend to do relatively poorly this time of year through the third quarter, according to BofA Global Research. Mid-term election years often fear volatility and bear markets.

Mid-Term Election Year Stock Market Seasonality: Bullish for UVXY

Also consider that stocks often do not recover until later in a mid-term year, according to Ryan Detrick of LPL Research.

Stocks Often Suffer Through August

The Bottom Line

While it’s probably a fine time to invest globally for the long-term, a near-term spike in volatility might be in the cards before we can see a stock market nadir. I like UVXY for short-term bullish bets on volatility but just know about the product’s risks should you hold it for more than a few days or weeks.