UVXY shares “hard to borrow”? No problem.
DISCLAIMER: This is in no way a recommendation to establish a synthetic short position in your account. It is for illustrative purposes only. You take full responsibility for your trades.
I’m throwing this post out there, despite a fear that it will coincide with a precipitous drop in the market. As every active investor knows, we have recently experienced a spike in the VIX from well below average to just over its long-term average value of 20. This leaves plenty of room to the upside. That said, I would prefer to share this now, rather than after the VIX falls and the markets rally.
I often hear traders express frustration over the desire to short shares of UVXY (or other stocks or ETFs), but they cannot because the shares are marked as “hard to borrow”. Fear not…there is another option…through options! (bad pun intended)
The answer is a synthetic short position. The Options Guide does a great job explaining of how it works.
For this post, I will only touch on the synthetic short, which essentially carries the same risk/reward of directly shorting a stock. The Options Guide contains many more strategies that help limit downside risk.
Using yesterday’s closing values, we get the following table (from Charles Schwab).
To create a synthetic short position of 100 UVXY shares, I would sell one call option and buy one put option, both with a strike price of 42.00. In selling the call (at the bid), I would receive a $4.50/share credit (x100 shares, or $4,500) for selling the call and pay $4.50/share (x100 shares, or $4,500) to purchase the put (at the ask).
To be clear, while the two cancel each other out and it may look like no money has left my account, I am now synthetically short 100 shares of UVXY and my position carries the same risk/reward profile. Knowing this, brokerages will require a certain amount of margin in the account to maintain the position.
The chart below describes the financial impact of various price moves on the underlying stock, UVXY: