"Vol" means "volatility" which is a measure of how much the market moves over some interval of time. If the markets are getting more stable, it goes down, if markets are more choppy or have a higher varianceit goes up. Companies created funds, called ETFs or ETNs that let buyers bet on volatility. These funds are super easy to buy from any brokerage.
These funds were leveraged, which means they are based on bets against the underlying VIX index. This allowed them to move multiples of what the VIX moved, 2x or 3x as much.
The markets have been super calm so people were buying these funds that returned a lot of money if the market stayed calm. All of the sudden on Monday the market moved a LOT. The DOW dropped something like 1500 points and then bounced back 700 points within something like 15 minutes.
This caused the leveraged "short vol" funds - funds that were designed to move opposite multiples of the VIX (VIX moving not much made the value rise, VIX moving a lot made them fall) - to lose so much money so fast that the companies had to close them down. Billions of dollars lost in tens of minutes.
Hope that helps. I'm not an expert but that's how I understand it.
I guess the people who bought the EFTs and ETNs lost money because the funds' and notes'value plummeted, right?
But who won the money? I assume someone must have, since it doesn't seem to have stop existing.
If the volatility moves from 15 -> 30, it goes up 100%. What happens if you are "short" (or on the opposite side) of something going up 100%? It loses it's entire value.
Now of course it's more complicated, and if the movement from 15->30 happens over a long period of time you can be modifying the hedges to work it out so you don't go to 0.. but if the price SUDDENLY goes up 100% with very little time to react, and you hit all your margin calls on various hedges.. then it's dead.
The article's handwringing because their number might have included "novice retail investors" who didn't understand what they were buying, and only bought it because it's been a winning bet for a while.
If you don't fully understand a financial or investment product, you shouldn't buy it. Financial products involving words like "leveraged" or "options" or "cash-settled futures" are quite often more like bets than investments, and you should only trade them if you fully understand the product you're trading and are willing to accept that losing the bet may mean losing all the money you put in.
These instruments are a way to do fancy portfolio balancing, not bets and speculation. You'll need "real" leverage where you can come out in the negative instead of $0 to do that.
