On February 5, 2018, the financial world witnessed a seismic event colloquially termed “Volmageddon”, a portmanteau of “Volatility” and “Armageddon” that quickly gained traction in trader forums. This day saw the CBOE Volatility Index (VIX) surge over 100% in a single trading session, from 18 at the open to over 37 by market close, triggering the catastrophic collapse of popular inverse VIX products like XIV (VelocityShares Daily Inverse VIX Short Term ETN) and SVXY (ProShares Short VIX Short-Term Futures ETF). These products plummeted by more than 90 percent, erasing billions in market value and catching thousands of traders off guard. Volmageddon became a defining moment for modern derivatives markets, laying bare critical vulnerabilities and underscoring an urgent need for enhanced professional education, a need addressed directly by the Certified Futures & Options Analyst (CFOA) credential.
The Destructive Mechanics of the Short Volatility Trade
The primary explanation for Volmageddon is attributed to the overcrowding of the short volatility trade and the unique hedge rebalancing requirements of popular inverse VIX Exchange Traded Products (ETPs). For an extended period prior to February 2018, the market experienced historically low volatility, making short volatility strategies exceptionally popular. Products like XIV and SVXY, designed to deliver returns inverse to the S&P 500 VIX Short-Term Futures Index, allowed investors to profit from low or decreasing volatility. This popularity led to a rapid growth in their assets under management (AUM), with the combined AUM of XIV and SVXY reaching approximately $3.5 billion by early February 2018.
The core issue stemmed from the structural design of these products. Issuers of inverse VIX ETPs aimed to maintain a market-neutral position, which required them to hold short VIX futures contracts matching their AUM. When volatility rose and the VIX futures index increased, the value of the ETPs’ AUM decreased. Crucially, the notional value of their short VIX futures positions—held as a hedge—simultaneously increased (representing mark-to-market losses on the hedge). To re-establish their desired leverage and market neutrality, these issuers were mechanically forced to buy VIX futures contracts.
This forced buying created a destructive feedback loop. As these funds purchased VIX futures to rebalance, it exerted upward pressure on VIX prices, which in turn caused the ETPs’ AUM to fall further. This necessitated even more buying of VIX futures, deepening the products’ losses and accelerating the VIX surge. This demand for futures contracts was substantial. By 4:00 p.m. ET on February 5th, with the VIX futures index up 39%, the estimated total short exposure in VIX futures that the ETPs needed to close out amounted to $2.6 billion. This required the purchase of approximately 93,000 contracts, representing about 23% of the average daily trading volume and nearly 16% of the total open interest in the VIX futures market in January 2018. Such a massive rebalancing act, especially in a concentrated market, inevitably led to significant price impact. Furthermore, 2x leveraged VIX futures funds like TVIX and UVXY also contributed to this upward pressure, requiring an estimated $550 million in additional futures purchases, bringing the total rebalancing demand to roughly 113,000 contracts.
The Unseen Hand: VIX Options and Prescient Trades
While the rebalancing of inverse ETPs is widely recognized as the primary catalyst, the role of the VIX options market also played a significant part. OptionMetrics’ findings reveal a highly abnormal volume of VIX call options purchased between 9:55 a.m. and 10:10 a.m. on February 5, 2018. Over 400,000 net calls were bought in a mere five minutes, followed by another 100,000, totaling over 500,000 calls. To put this into perspective, this volume exceeded the median end-of-day total call buying in VIX options over the previous two years.
The timing of these trades was critically important and appeared “highly prescient”. They occurred when the VIX was near 19, a relatively small increase from its open of 18.44, well before the major acceleration of the VIX began in the early afternoon. These large trades were directional bets on both February and March VIX future prices. Crucially, market makers on the opposing side of these short VIX call trades found themselves in a negative gamma position. This meant that as the VIX rose, they were compelled to buy VIX futures to maintain their delta-neutral positions, thereby exacerbating the upward pressure on VIX futures and further accelerating the VIX surge. High-frequency trading (HFT) firms also potentially contributed by front-running, anticipating the rebalancing needs of the short volatility ETPs.
The CFOA Imperative: Learning from Market Dislocations
Volmageddon served as a stark, defining moment that exposed a recurring problem in financial markets: the widespread use of complex instruments by participants who often did not fully grasp their underlying mechanics, inherent risks, or structural fragilities. The event was not merely a story about rising volatility; it illuminated deeper issues related to product design, convexity in VIX futures exposure, margin mechanics, and the behavioral tendency of investors to assume that past market calm would continue indefinitely. For those with robust derivatives training, the embedded risks were not a surprise; for many others, the outcomes were catastrophic.
This crisis fundamentally underscored the imperative for structured, professional-level education in derivatives. To address this critical gap, the Certified Futures & Options Analyst (CFOA) credential was created. Its core mission is to move beyond “surface-level concepts” like option payoffs and ensure that traders, analysts, and risk managers acquire a deep, working understanding of how derivatives truly behave in practice, especially under stress.
The CFOA curriculum is designed to build a comprehensive skill set:
• Foundational Knowledge: Candidates begin with a strong grounding in futures and options contracts, margin requirements, and pricing models.
• Advanced Applications: The program progresses to sophisticated areas such as hedging applications, volatility products, and robust risk management frameworks.
• Real-World Integration: A key feature is the integration of case studies from major historical events, including the 2008 financial crisis, the 2015 Swiss franc shock, and Volmageddon itself. These case studies serve to illustrate the direct translation of theoretical knowledge into real-world consequences.
• Practical Application: By the final level, candidates are challenged to apply their knowledge to build, critique, and stress-test various strategies under dynamic market conditions where volatility and liquidity can shift dramatically and rapidly.
The ultimate aim of the CFOA is not to entirely prevent losses—an impossible feat—but to cultivate a professional mindset that rigorously prioritizes capital preservation, effective leverage control, and structured risk processes. Volmageddon stands as a powerful testament to the severe repercussions when these fundamental principles are neglected. The CFOA endeavors to develop professionals capable of identifying hidden risks, thoroughly understanding complex product structures, and adapting decisively when markets turn unstable. In essence, credentials like the CFOA are dedicated to raising the standard of practice within an industry frequently prone to costly mistakes, acknowledging that Volmageddon will likely not be the last significant volatility shock.
Consequences and Enduring Lessons
The immediate consequence of Volmageddon was the near-total wipeout of inverse short-term VIX ETPs like XIV and SVXY. However, not all volatility products suffered equally. The VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV), which tracked longer-dated VIX futures, experienced much lower losses—only 1.6% during trading hours and 5.9% by evening. This disparity highlights that shocks propagate less strongly at longer horizons of the VIX futures term structure due to expected mean reversion in the VIX and smaller volatility risk premia for longer-dated contracts.
Volmageddon served as a stark reminder of the pitfalls of hedge and leverage rebalancing, particularly in markets that become highly concentrated and volatile. It underscored that complex financial instruments, especially leveraged and inverse ETPs, are generally not suitable for buy-and-hold investors due to daily rebalancing leading to compounding mechanics that can significantly hurt long-run performance. Their prospectuses often explicitly warn against holding them for periods longer than a day.
For regulators and market participants, the event emphasized the critical importance of monitoring hedge and leverage rebalancing strategies, the market concentration of leveraged products, and the volatility of the underlying indices upon which such investment structures are based. Volmageddon profoundly demonstrated the dangers of “crowded trades” and the potential for cascading effects when a large number of participants employ similar strategies that require synchronized actions during market stress. The lessons learned from Volmageddon continue to inform risk management practices and highlight the indispensable value of professional-level derivatives education in navigating the inherent complexities and unexpected shocks of financial markets.