Levered and inverse VIX ETP option contract adjustments: No harm,no foul?

The terms of exchange-traded stock option contracts are usually adjusted when corporate actions take place. These adjustments are made to safeguard the value of the outstanding option contracts. Recently, a new type of corporate event has appeared ? levered and inverse exchange-traded product issuers are reducing leverage ratios with increased frequency. While such changes directly affect option values, no contract adjustments are made, resulting in windfall transfers of wealth from outstanding long to outstanding short option holders. In one instance alone, the transfer was more than $US100 million. To remedy the problem, we offer a simple contract adjustment procedure.