After a long calm stretch, a sharp equity decline sent volatility futures up by more than they had ever risen in a day. Inverse volatility products, which had to buy futures to rebalance as prices rose, were forced to buy into the spike — and their own buying pushed prices further, destroying most of their value within hours. At least one product was terminated outright.
The lesson is not that short volatility never works. It is that a strategy which had produced years of smooth returns contained a mechanism that could lose nearly everything in an afternoon, and that the rebalancing rules of leveraged products can turn a bad move into a terminal one.
Example: the same structural risk lives in any short volatility book. A trader short XYZ strangles sized to a normal week faces losses many times the collected credit in a session that moves several standard deviations, and the margin call arrives before the thesis has a chance to be right.
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