In a continuation of yesterday’s blog, some people have asked me to report on any developments as far as how the options are being handled in the SVXY methodology change saga and also to comment on how I feel about it all.
As a quick reminder, ProShares made a very abrupt and nearly immediate decision to change the methodology of SVXY from it’s usual 1x tracking of the short term VIX futures index to a 0.5x tracking methodology instead. Essentially they are attempting to water down the product in hopes of reducing the risk in the future. Volmageddon as we’re calling it on February 5th will have some aftershocks and a lot of these products will be going through changes and transitions and it’s possible that some will just not survive.
But since SVXY has reasonably good volume in the options market the big question becomes:
How will they deal with all those open options? Will they also be adjusted to reflect the 0.5x change?
For anybody who is holding options on SVXY and UVXY I’m sorry to report that the Options Clearing Corporation (OCC) has determined they will NOT be adjusting the open options.
I don’t ever recommended holding options on volatility products so I have to assume that anybody who was holding options has a level of sophistication and option trading experience that they will know what this decision means for their open contracts. I won’t be insensitive to talk about what you already know. So how do I feel about it?
Sometimes people ask me why I’m critical of the financial industry. Well beyond just the general status quo of high fees and fairly poor performance, I think days like today demonstrate where my negativity comes from. And not just by me, but from millions of investors out there who have been burned at some point or another by moves like this one.
There were several ways this SVXY methodology change could have been handled more positively, but it seems decisions were made behind the scenes that have left the retail investors to pay for the changes. I think it’s disgusting and I’m sorry to anybody out there who did have open option contracts on these volatility products. I don’t think negligence is a strong enough word today.
The volatility space will grow, it will evolve, and we will always try to use these products responsibly to give a little boost to our retirement funds. This past February, Volmageddon, the debacle with ProShares, it hasn’t turned me off investing one bit of course. It really comes down to experience and education. I’ve tried hard to do my part in that regard and I will continue to do so. The more educated investors are on the functionality and risks of these products the better the entire volatility space will be.
At the very least there should be a walk of shame like Sersa in Game of Thrones. ProShares, OCC, shame shame.
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