Volmageddon, 2018Medium

A trade that had paid steadily for years ended in a single afternoon — because the products were designed to buy volatility exactly when it spiked.

3 min read · 590 words · Updated 4 Sep 2026

What happened

• 2012–17 — volatility stays historically low. Products that short VIX futures deliver years of steady returns and attract billions from retail and institutional buyers alike.
• 5 February 2018 — US equities fall sharply. The VIX roughly doubles in a single session, from the high teens to the mid-thirties.
• That afternoon — the largest inverse products must buy VIX futures to rebalance. Their buying arrives in a thin late-session market, pushing futures higher still.
• Same evening — the biggest inverse note loses the overwhelming majority of its value and is subsequently terminated by its issuer under its own acceleration terms.

The mechanism

• Daily-reset products must trade in the direction of the move. An inverse product that is short volatility has to buy volatility as it rises, just to maintain its stated exposure the next day.
• The rebalance was predictable and concentrated — near the close, in a market that was already stressed. Others could anticipate it.
• The products had grown large relative to the underlying futures. A hedge that is small relative to its market is a hedge; one that is large is a price.
• The payoff shape was always this: many small gains, one catastrophic loss. Years of good returns were the premium being collected, not evidence of safety.

What it teaches

• Selling volatility is an insurance business. Judge it by the loss year, not the average year (see volatility).
• Read what a product must do mechanically in the scenario you fear — the prospectus describes the rebalancing and the acceleration terms.
• Daily-reset leverage is a short-horizon instrument, and the decay compounds against you in choppy markets (see the volatility-drag calculator).
• Size relative to the underlying market is a risk metric. Crowded, mechanical flows become the market they were supposed to track.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• Volatility ETPs — the products themselves, and what a daily reset commits them to.
• Factor certificates — the same daily-reset arithmetic, sold on a different shelf.
• Volatility — what being short volatility pays, and what it costs when it is wrong.
• How products fail — the pattern: a product that must trade in the direction of the move.