Contrary call: ProShares Ultra VIX Short-Term Futures (UVXY)
The backdrop: The market action in recent weeks makes it clear that the conventional thinkers are short volatility and going long in the PowerShares QQQ ETF. That trade has built up nearly to a breaking point; that’s why you saw days last week when the QQQ had big down days for not much reason. While it has rebounded weakly, I think there’s a good chance the QQQ has topped out and the market dips again.
UVXY, the ProShares Ultra VIX Short-Term Futures, trades on the perception that there’s short-term volatility. It even uses options against that expected movement, which means it naturally goes down somewhere around 60 to 70 percent in a year. It’s a terrible investment, fine only for a fast play; you wouldn’t want to own it long-term.
The contrary move: When the market goes down, UVXY has good days. With so much pressure having built up thanks to the conventional thinkers, I think happy days could be here again soon.
The play: I believe UVXY has room to run to over $11 at this point, which would be a gain of more than 10 percent. I am long UVXY – having purchased positions on Friday and Monday – and am net-bullish in UVXY options as well. I’d add to my position at around $9.20 and would cut the position under $9, but I believe I will be able to instead start taking profits at $10.50.
Note: I’m not shorting the QQQ because there is no reason to double-down on this play, and UVXY gets the job done; if the NASDAQ 100 sees a pullback of 2 to 3 percent, UVXY should go up by 10 percent or more.
Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, primarily using leveraged ETFs. At the time this article was published on RagingBull.com, he had purchased UVXY on Friday and Monday at an average price of $9.70 per share; he has open options positions in the stock – but he is net long (bullish) – and some of those options have been in place for several weeks. He is planning to trade UVXY as described in this commentary.