Volatility Options Suffer Bloodbath as ProShares Tweaks Funds

Options tied to exchange-traded products that allow investors to place bets on U.S. equity volatility are getting crushed in early trading on Tuesday.

Late on Monday evening, ProShares announced that it would be dialing down the leverage on the Short VIX Short-Term Futures exchange-traded fund (ticker SVXY) -- a product that offers exposure to market tranquility -- and the Ultra VIX Short-Term Futures ETF (ticker UVXY), whose owners were making a levered wager that equity volatility would increase.

Reducing the leverage on these funds will dampen their price swings going forward. The shifts also make it much less likely that any out-of-the-money options tied to these products would ultimately pay off.

For instance, a call option on SVXY with a strike price of 30 that expires in January 2020 is down more than 80 percent in early trading on Tuesday.

“I estimate that more than $100 million of options premium has instantly vanished as a result of this change,” said Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors. “Options on UVXY and SVXY should be offered on the open immediately, and if they are not, you should sell them,” he told clients in an email on Monday evening.

ProShares, through a spokesperson, declined to comment on the changes beyond the announcement.

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