Volmageddon: The VIX Shock of February 2018

What Happened February 5, 2018, became known as "Volmageddon" due to an unprecedented spike in the Cboe Volatility Index VIX, often referred to as the market's "fear gauge." This single day witnessed an extraordinary and violent unwinding of short volatility positions, primarily in inverse VIX exchangetraded products ETPs like XIV. For months leading up to this event, a popular trade involved selling volatility, betting that the VIX would remain subdued, driven by a prolonged period of low market turbulence. However, on February 5th, the stock market experienced a sharp selloff. The Dow Jones Industrial Average plummeted by over 1,100 points, its largest singleday point drop at the time. As equity markets tumbled, demand for hedging surged, causing the VIX to skyrocket. The VIX, which had been trading in a historically low range, suddenly surged, closing up an astonishing 115.60% for the day. This massive singleday leap triggered circuit breakers and forced liquidations in products designed to profit from low volatility. The most prominent casualty was the VelocityShares Daily Inverse VIX ShortTerm ETN XIV, which lost approximately 96% of its value overnight, leading to its eventual closure and liquidation. The immediate market reaction was one of shock and panic. The rapid and extreme move in the VIX propagated through derivative markets, causing widespread losses for investors who were short volatility. While the broader market selloff recovered relatively quickly, the