The 2018 Volmageddon — a Product Betting on Volatility Fell -97% in a Single Day
There was a product that bet on "the market staying calm." But in the single day the calm broke, that product collapsed more than -90%.
The VIX and Inverse-Volatility Products
The VIX is an index representing the volatility the market expects going forward, and it is called the "fear index." The more anxious the market, the higher the VIX rises.
In the 2010s, products betting that "the VIX will stay low" became popular. A representative one was an inverse (opposite-direction) volatility ETN called XIV, issued by Credit Suisse. It looked like it steadily earned returns when the market was calm, but a big risk was hidden inside.
February 5, 2018, a Single Day's Collapse
On February 5, 2018, when the Dow plunged, the VIX surged. The VIX jumped from 17.31 on February 2 to 37.32 on February 5, setting a record for the largest single-day rise at the time.
Products betting on low volatility, like XIV, moved the opposite way. XIV's indicative value crashed more than 90% (about -97%) that day and was ultimately liquidated and delisted. When volatility surged, this product had to buy VIX futures, and that in turn pushed volatility up further in a vicious cycle.
The Dow also fell -1,175 points that day, the largest single-day point drop at the time. It was not the problem of a single product but a volatility shock across the whole market.
The Lesson — the Trap of 'Steady Returns'
Volmageddon shows the risk of a product that "earns steadily in normal times, then loses it all at once one day." Such products feel safe because the return curve looks smooth, but they are vulnerable to the rare extreme event.
In particular, inverse and leveraged products are rebalanced daily, so they are not suited to long-term holding, and if volatility surges you can lose most of your principal. You must check not a product's name but "what happens to it on the worst day."
Preguntas frecuentes
Q. Do inverse and leveraged ETFs have the same risk?
The structure differs, but a similar risk exists. Such products are designed to track daily returns, so when volatility is high or you hold long-term, they can diverge greatly from the original index. During sharp swings losses can grow rapidly, so they are closer to short-term or expert use.
Q. Why did XIV disappear entirely?
XIV had a condition that it would be redeemed early if its daily indicative value fell below a certain level (about 20%) from the prior day. On February 5, this condition was triggered and the product was terminated. Checking whether a product has such an "automatic liquidation" clause is also important.
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