HomeTrading strategiesWhat Is Volmageddon 2.0: Put together For The Worst

What Is Volmageddon 2.0: Put together For The Worst

“Volmageddon” shouldn’t be a phrase within the dictionary.

It was a time period coined by the derivatives trade that refers back to the excessive market occasion that occurred on February 5, 2018.

As of this writing in early 2023, the following “volmageddon” has not occurred but.

Individuals are speculating that it’s not a matter of “if” however “when” it could occur.

“Volmageddon 2.0” is the following volatility occasion that can occur that’s just like (if not bigger than) the occasion on February 5, 2018

I don’t know who particularly got here up with the phrase, however I’d admit that it’s a catchy title.


The phrase “Armageddon” is a phrase discovered within the dictionary.

It originates as a biblical reference to the situation of the place the place the final battle between good and evil will probably be fought.

The important thing phrase right here is “final,” as in “final battle.”

The implication right here is that this battle would destroy the world, and therefore there could be no subsequent battle afterward.

Armageddon has now come into well-liked utilization to consult with any dramatic and catastrophic occasion more likely to destroy the world or the human race.

Volmageddon is a play on that phrase the place the prefix “vol” refers to volatility.

Choices traders who make use of “brief volatility” methods will comprehend it nicely as a result of they somewhat say “brief vol” for brevity as an alternative.

On February 5, 2018, the Dow Jones Industrial Common misplaced greater than 1,500 factors throughout intraday buying and selling.

supply: TradingView.comThis is its greatest intraday level drop in historical past as much as that point.

That’s not to say that it couldn’t make bigger intraday swings sooner or later.

The DOW lastly closed down by 1,175 factors for the day.

It’s pure that when market indices drop, the VIX will rise. The VIX is the CBOE Volatility Index, also known as the “concern index” and used as a measure of market volatility.

That day was accompanied by an excessive spike in volatility, the place the VIX rose from 17.16 to 37.32 (shut to shut), a spike of 117% — the most important VIX spike until then.


supply: TradingView.com

When VIX goes up by such a big quantity, it financially damages sure exchange-traded merchandise (ETPs).

Particularly, the “inverse volatility” merchandise are hardest hit.

Inverse volatility merchandise are funds that capitalize on falling volatility.

They’re designed to revenue when volatility falls and vice versa.

When volatility rises (as within the spike within the VIX), they lose worth.

Previous to the occasion was the rising recognition of those inverse volatility merchandise resulting in an over-crowded “brief vol” area.

Amongst merchandise similar to SVXY, UVXY, and many others., one highly regarded inverse volatility product was XIV — an apparent play on the reverse spelling of VIX.

I used the phrase “was” as a result of XIV now not exists.

It was terminated when it misplaced 96% of its worth throughout Volmageddon.

Someplace within the legalese, there should have been a clause that talked about that termination of the product is a chance if the product loses 80% of its worth, and if such an occasion occurred, traders would probably lose the whole lot of their funding.

Many traders don’t learn such legalese, nor do they imagine that such an occasion may occur. Sadly, it did.

Greatest Volatility Spike In Recorded Historical past

What was uncommon was why volatility elevated a lot when the S&P 500 dropped solely about 4% that day.

I’m not saying that 4% shouldn’t be a major drop.

However one would assume such a big volatility enhance would solely happen in a a lot bigger market crash.

Many traders additionally didn’t perceive how these inverse volatility merchandise derived their worth.

It isn’t based mostly on provide and demand however somewhat on the end-of-day rebalancing of first and second-month VIX futures contracts.

These ETPs that didn’t get terminated misplaced a major quantity of worth.

Since I can now not pull up the chart of the XIV after it acquired de-listed, right here is the chart of the SVXY:


supply: TradingView.com


That’s fairly a drop off a cliff.

That is not often seen even in probably the most unstable of shares.

Can one of these occasion occur once more? Positive, it might.

The mainstream media is looking it Volmageddon 2.0.

Simply yesterday (February 17, 2023), CNBC titled their media piece Volmageddon 2.0: How Choices are Influencing Markets, the place it says that zero-DTE choices are actually estimated to make up about 50% of the each day quantity of the S&P500 index choices.

The Wall Avenue Journal is asking the query in its article, Are 0DTE Choices creating the following Volmageddon.”

In an article printed in investing.com, J.P. Morgan’s chief international markets strategist, Marko Kolanovic, mentioned that the rise of buying and selling near-term U.S. fairness choices may set off the following one.

How is Volmageddon completely different from the Flash Crash?

The Flash Crash refers to Could 6, 2010, when the DOW dropped nearly a thousand factors (or about 9%) intraday, solely to recuperate most of that loss inside minutes.

On this case, the blame was positioned (rightfully or not rightfully) on high-frequency buying and selling algorithms, which precipitated a cascade of promoting.

Volmageddon is a extra sustained market occasion that lasted a number of days.

How one can defend in opposition to Volmageddon 2.0?

All the time use defined-risk spreads or mixtures thereof.

The worst factor that you are able to do is to brief the VIX by promoting a unadorned name choice.

You get a small premium for doing it.

But when VIX skyrockets via the roof, the brief name will probably be deep within the cash, and you may be obligated to purchase again the brief name at expiration for a really excessive value.

If VIX is insanely excessive at the moment, your internet loss is theoretically limitless — particularly in case your expiration is brief and there’s no time for the VIX to calm again down previous to the expiration of the choice.

What different names has Volmageddon been known as?

Volmageddon has been referred to by different names similar to “Volpocalypse” and “Volnado.”

However the title that caught with mainstream media is “Volmageddon.”

Simply keep in mind that the VIX can go up dramatically and unexpectedly.

That is what makes shorting the VIX and different variants of that technique a bit harmful.

Using defined-risk choices constructions could be smart.

We hope you loved this text on Volmageddon 2.0.

When you’ve got any questions, please ship an electronic mail or go away a remark under.

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Disclaimer: The data above is for instructional functions solely and shouldn’t be handled as funding recommendation. The technique introduced wouldn’t be appropriate for traders who should not accustomed to change traded choices. Any readers on this technique ought to do their very own analysis and search recommendation from a licensed monetary adviser.


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