The VIX Explosion: 2018's Volatility Shock
On February 5th, 2018, the VIX experienced its most dramatic surge in history, rocketing up 116% in a single day. As popular short-volatility products imploded, the market’s “fear gauge” soared from around 15 to over 35 in hours, triggering billions in losses and marking the end of the short-volatility trade that had dominated market dynamics.
While this event’s complexity defied traditional analysis - involving everything from volatility targeting strategies to the unwinding of massive short positions - Sumtyme’s mathematical abstraction approach cut through the chaos. Our approach focused on the underlying mathematical principles driving the VIX movement, in contrast to traditional approaches attempting to model the intricate web of volatility products and market dynamics.
Our model identified the initial volatility breakout and maintained a bullish bias throughout the spike, providing clear direction even as the VIX posted its largest one-day move in history. This ability to navigate such an unprecedented market event demonstrates how mathematical abstraction, rather than conventional volatility modelling, can effectively anticipate and track even the most extreme market dislocations.
Most notably, our model captured the devastating impact on short-volatility products, with ProShares Short VIX Short-Term Futures ETF plunging from nearly 275 to below 25. The model’s bearish signals preceded this collapse, demonstrating its ability to identify structural weaknesses in seemingly stable investment products. This performance during Volmageddon showcases how our mathematical framework can detect not just price movements, but fundamental market vulnerabilities that traditional risk models often miss.