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On the watch: ProShares Ultra VIX Short-Term Futures (UVXY)

Jeff BishopJeff Bishop ·

The set-up: The big headlines of late have been about a market that has reached record highs with little struggle and even less volatility. In fact, for the first half of this year, the Standard & Poor’s 500 registered its second-smallest drawdown since 1950; the VIX – which measures the expected volatility of the index for the next 30 days – has closed under 10 a total of 11 times since May 8, something it had done just 20 times in the preceding 27 years.

The Dow Jones Industrial Average, the Russell 1000 and 2000 and the Nasdaq Composite all finished at record highs on Wednesday, the first time since March 1 that they all closed at record levels on the same day.

Normal market times include drawdowns, and when everything moves one way – and the market is showing no fear of a decline – a short-term trader knows it’s time to look in a different direction.

The play: I have been playing the ProShares Ultra VIX Short-Term Futures (UVXY) for a few weeks and have actually been underwater on the trade, but the market is going to pull back here at some point and the RSI (Relative Strength Index) has the VIX deep into oversold territory.

It can go lower from here, but not much lower without a bounce.

In a short-term trade – three days or less – I think you could see the UVXY bring you a gain of 10 percent or more.

What I am looking for: UVXY is based on short-term volatility options and S&P 500 puts. There is so little action in S&P puts right now that the market doesn’t seem to believe the index can go down; when it does – and it will again – we could see a few volatile days.

Ideally, I’m hoping the S&P makes a new high or retouches the same high without breaking it for a few days. I’m not expecting it to reverse, but to test the new high a few times and then retrace; the VIX rising as the market retests the high would be your ideal set-up; if I see that, I’ll add to my position, looking for a pretty quick gain of 10 percent over the next few days.

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Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, primarily using leveraged ETFs.  At the time this was published on RagingBull.com, he held 1,000 shares of UVXY, with an average purchase price of $37.20 per share. He has no open orders on the ETF, but is planning to buy more if the market moves as described in this article.

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