February 28, 2018 / 9:19 PM / a year ago

Options traders lost big from tweak in short volatility ETPs: strategists

NEW YORK (Reuters) - Options traders suffered big losses due to recent changes in the investment objective of ProShare Capital Management LLC’s two exchange traded funds that track near-term equity volatility futures, derivatives strategists said on Wednesday.

Traders who owned options on ProShares Short VIX Short-Term Futures ETF (SVXY.P) and ProShares Ultra VIX Short-Term Futures ETF (UVXY.P) have lost at least $100 million in premiums, according to Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors in New York.

“It’s obviously a one-time effect but it is pretty unprecedented,” Chintawongvanich said.

The losses followed ProShares’ announcement on Monday that it was tweaking the investment objectives of the funds to reduce their target exposure to the S&P 500 VIX Short-Term Futures Index .SPVXSPID.

ProShare has declined to comment beyond its statement.

Starting at the close of regular trading on Tuesday, the Short VIX Short-Term Futures ETF (SVXY) now seeks to rise 1 percent when the index it tracks declines by 2 percent, compared with its earlier tracking ratio of a negative one-to-one.

Similarly, the Ultra VIX Short-Term Futures ETF (UVXY) now aims to gain 1.5 percent, instead of 2 percent, when the index it tracks increases by 1 percent.

The adjustments reduce the funds’ reactivity to changes in volatility at a time when these types of products have drawn regulators’ scrutiny.

Reducing these funds’ reaction to volatility, however, was bad news for anyone who owned options on them when ProShares announced the change. The implied volatility, an options-based measure of how much the securities are expected to move in the future, slumped sharply on Tuesday.

“I think they caught anybody holding these things, in particular options holders, completely flat-footed,” said Lincoln Edwards, principal at Austin-based Houndstooth Capital Management.

On Wednesday, the 30-day implied volatility on SVXY was at 42.47 down from 75 percent on Monday, before the change to the fund’s investment approach.

SVXY and UVXY options will not be adjusted for the ProShares fund changes, equity derivatives clearing organization, the OCC, said in a memo on Tuesday.

“If you were long options on SVXY or UVXY, you lost money,” said Chintawongvanich.

The sharp losses also raised questions about the advisability of trading in options on these products, market participants said.

“We were not holding options on these things two days ago and that’s purely a miracle, because we trade them routinely,” said Houndstooth’s Edwards.

“It makes the options on these things borderline untradable,” he said.

It is likely that retail players took the worst hit, said Stuart John Barton, portfolio manager at Invest In Vol, a volatility-focused registered investment advisor in Stamford, Connecticut.

“I think retail players are generally long options. It’s the long options positions that got hurt,” he said.

Reporting by Saqib Iqbal Ahmed; Additional reporting by Trevor Hunnicutt; Editing by Daniel Bases and David Gregorio

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