Finally, after UVXY trading levels dropped below $2.50 per share, Proshares has announced a 1:10 reverse split, effective the morning of 23-June-2023.
Some people seem to anticipate that there will be significant price moves in UVXY, motivated by a reverse split. I’m not in that camp. UVXY’s price is tied to VIX futures’ price, which couldn’t care less about UVXY’s share price. A long time ago it was common for stocks to have sizeable run-ups motivated by upcoming splits (not reverse splits). But a split does not provide any economic edge or penalty, at least with the shares themselves, and I think this strategy stopped working a long time ago. At best, forward stock splits are a momentum indicator.
Reverse splits do have some significant second-order effects on options, which I talk about later in this post.
Proshares’ 1.5X leveraged short-term volatility ETP, UVXY, must frequently reverse split to keep its prices in a reasonable trading range—otherwise, its share price would rapidly approach zero. For example, an original share of UVXY purchased for $40 at the fund’s inception in 2011 would now be worth less than 0.0001 cents.
For a discussion of what causes this ruinous price erosion, see “How Does UVXY Work?” Lacking bear markets, these funds are ravaged by contango at rates that vary between 50% and 75% per year. Monthly decay rates run in the 7% to 18% range. See this post, for a chart showing how those decay rates have changed over time.
From my simulations, 1.5X leveraged volatility funds will reverse split about every 8 to 22 months.
UVXY Reverse Split History
|Inception / close price right before reverse split (split adjusted)
|Months since inception /last split
|1st Rev. Split
|2nd Rev. Split
|3rd Rev. Split
|4th Rev. Split
|5th Rev. Split
|6th Rev. Split
|7th Rev. Split
|8th Rev. Split
|Leverage Shift from 2X to 1.5X
|9th Rev. Split
|10th Rev. Split
|11th Rev. Split
If you hold shares of UVXY there isn’t anything to worry about when it reverse splits. The value of your investment stays the same through the reverse split process, however, your broker may charge some fees, e.g., a $20 “Reorg Fee”. You just have 5X fewer shares that are worth 5X more each (assuming a reverse split ratio of 1:5). If your share holdings are not a multiple of five, say 213 shares, you will get 42 reverse adjusted shares and a cash payout for the 3 remaining pre-split shares.
If you are short UVXY, same story, no material impact.
In theory, if you’re holding UVXY options (long or short) when the reverse split occurs there’s no material impact, There will be sets of spilt-adjusted option chains generated that will show pricing on your options, and those prices should have continuity with the pre-split values. However, In practice there are issues.
- The split-adjusted chains can take up to a week to start trading again, which if the timing is bad could be a big deal.
- The bid/ask spreads tend to widen out on the split-adjusted option series. The option market makers’ attention has shifted to the new option series created after the split, so they aren’t competing for business on the adjusted options. I’ve seen zero bids on options that are clearly worth something and outrageous asks. If this happens, don’t freak out, if you want to close the positions, you should still be able to get fills via limit orders between the bid/ask price. You can use an option calculator + prices on the new option series to figure out an appropriate price. If you’re long, you also have the capability to exercise your options, and sell the underlying to capture any intrinsic value. Lack of volume or open interest doesn’t mean there isn’t liquidity, if your position still has significant value, you can still close out your position to capture most of that value, it will just require more effort on your part.
- If your option positions are being used to hedge a position in the underlying, e.g., long calls to hedge a short UVXY position, then there is a risk that your broker’s margin calculations will be disrupted by the reverse split on the options. If there are no quotes, or if your broker’s software can’t handle the non-trivial calculations associated with the adjusted option series, you might get a margin call and/or a forced close-out of your position. If you’re in a situation like this, a call to your broker before the reverse split is in order. One possible workaround would be to shift the options to another security (e.g,. VXX or $VIX ) at appropriate ratios until after the reverse split, or hedge the underlying by effectively nullifying the position (e.g., by holding the appropriate number of VXX shares) until the split has happened and the options are trading again. This strategy is sometimes called “shorting against the box”, which refers to when people used to hold their paper stock certificates in safety deposit boxes.
- Understanding the split-adjusted options chains is going to hurt your head. The Options Clearing Corporation adjusts for the reverse split by adjusting the number of shares per contract by the split ratio. For a 1:5 reverse split the number of shares of the underlying represented by the option contract will go from the usual 100 to 20. The option chains don’t adjust the strikes, and the underlying symbol changes to UVXY(some number)—which is 20% of UVXY’s price. New options will be generated with newly reverse split UVXY as the underlying, but the old adjusted options will hang around until they expire. In general, if you’re hoping to sell your options at some point, rather than just letting them expire it’s probably a good idea to roll your options into the current series after the split. A combo order closing out the old position with an opening order in the new series with an appropriately priced limit order, is probably the best approach. Start with a price you know that’s too good to be true for you, and gradually shift it in the market maker’s favor until you get filled.
For regular, forward splits things are more straightforward —the strike price of the options is divided by the split ratio, and the number of contracts is multiplied by the split ratio. See the OCC memo on an SVXY’s 2:1 split for an example. SVXY did a 2:1 split on 14-July-17. This basic approach can’t be used on reverse splits (multiply the strike price and divide the number of contacts by the split ratio), because depending on the number of contracts held some customers would end up with fractional contracts—which is a no-go.
The chart below uses my simulated data to show what 1.5X UVXY & 2X UVXY prices would have been starting in 2004
For more on UVXY see: