When we arrived for work on February 5th, 2018, it didn’t seem as though all hell would break loose in the options market. Timber Hill’s options market-making team had a few Philadelphia-area natives, and while they were busily crowing about the Eagles’ Super Bowl victory, I was showing my college-student son’s videos of the ensuing chaos. There was indeed a sense that a pullback in the broader market was occurring, and that it had the potential While the prior week saw the Cboe Volatility Index (VIX) finally lift up sharply from its year-long flirtation with single-digits – going from 11.08 to 17.31 – that was only a harbinger of what would transpire next.[i]
For some perspective, by the end of the day on February 5th, 2018, VIX would more than double to 38.80 and would touch 50 the next morning. During the two weeks from January 26th to February 9th, 2018, the S&P 500 (SPX) fell over 10% from a record high. That was quite a readjustment, to say the least.
5-Month Chart, VIX (blue/white candles), SPX (green line)
While it is tempting – and instructive – to see parallels to today’s trading climate, there are more differences than similarities. For starters, while the current trading range of VIX is low by historical standards, 12.5-14.5 is firmly above the 9-11 range that prevailed throughout late 2017-early 2018. Secondly, and perhaps more importantly, although we have seen a proliferation of institutional funds and ETFs that utilize volatility-selling strategies to enhance income, shorting volatility was a popular strategy with retail and institutional investors at that time. I vividly remember a conversation with a counterpart who had very reasoned and rational-sounding arguments for continuing to sell VIX at 10. My counterargument then (and now) is that volatility-selling is a one-tailed trade. When one sells volatility in the low-teens or less, the profits tend to be small and come slowly, but the losses have a way of coming quickly and violently. One bad week can overturn months of modest profits. Volmageddon was perhaps the ultimate example.
It is impossible to recount the events surrounding Volmaggedon without mentioning XIV, an equity traded note (ETN) that was a popular tool for shorting volatility. XIV was designed to match the inverse performance of VIX (hence its symbol), and because it had many characteristics that were similar to a leveraged ETF, it became the vehicle of choice for many volatility sellers. Like an ETF, XIV traded continuously on an exchange, but unlike an ETF, which holds underlying assets that allow the fund to be created or redeemed, an ETN is a credit obligation of its issuer. In the case of XIV, the issuer was Credit Suisse.[i] This proved to be a critical distinction that was underappreciated by too many investors. The fund shrunk from $1.9 billion to $63 million in one session, and its demise was one of the keys to the explosion of volatility indices.
About a year ago, when “zero-dated”, or “0DTE” options came into the public’s consciousness[ii], there were some hand-wringing predictions that 0DTE options could lead to another Volmaggedon. I never agreed with that premise, since major events tend to build up over time, which is completely antithetical to the nature of options that expire in a day or less. (I do believe that these options can and do amplify intraday moves, and have played a key role in some of the larger advances that we have experienced over the past year). In a September podcast I discussed this topic with the Cboe’s Mandy Xu[iii]:
Mandy Xu: …I think you know there have been some very big headlines being made throughout the year by people who think this could potentially lead to another “Volmageddon” or another big systemic event. And I would say for the most part, a lot of the analysis is based on incomplete or incorrect assumptions about who’s trading these products and what they’re using them for.
Steve Sosnick: … if you were sitting in the room with me, I’d have given you a big high five along the way cause, because that really synchs up with what I’m thinking…
I have frequently utilized the mantra, “history doesn’t repeat itself, but it does rhyme.” The current setup has some elements that might recall the run-up to the events that precipitated Volmaggedon, but there are crucial differences. Those who invest and trade must always be wary for nasty events that seemingly arise from nowhere, but the current setup doesn’t bode for a re-run of the events of six years ago. If (when?) we have a market pullback and a rise in volatility in the near future, the specific causes will be different from those of 2018, even if the outcomes could seem quite reminiscent.
[i] This news report is a useful resource: The Day The Vix Doubled: Tales of ‘Volmageddon’ – Bloomberg. It is an oral history published on the one-year anniversary of Volmageddon, and I was privileged to be included among those recollecting the event.
[ii] Yes, the same bank that lost multiple millions of dollars in bad margin loans to Archegos in 2021 and failed in 2023.
[iii] See my piece from last Friday, The “Debutante Ball” for 0DTE Was a Year Ago Today | Traders’ Insight (ibkrcampus.com)  She worked at Credit Suisse during Volmageddon.
[iv] She worked at Credit Suisse during Volmageddon.
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