Volatility ETFs drop off a shelf during market pullback

Obscure security linked to stock volatility plummets 80% after hours, sparking worries of bigger market effect

The CBOE Volatility Index, better known as the VIX, is the most widely followed barometer of expected near-term volatility for the S&P 500 Index.

The VIX Index spiked from 17 to an intraday high of 50 points following a sell-off in U.S. equity markets. That's the largest one-day increase in the VIX ever, according to Cboe.

"The market is a casino on steroids" with these exchange-traded funds and exchange-traded notes, billionaire activist investor Carl Icahn told CNBC on Tuesday during an interview on " Halftime Report".

"It is unclear whether this is a one-off attempt to capture volatility while it is still elevated from the collapse in price of XIV and SVXY or a return to picking up nickels in front of a steamroller - which worked for a long time", Tchir added.

The VIX's long-term average stands at 19.34.

The VIX index, which measures volatility, has spiked again to 49 points - its highest level in many years.

Months of extended calm in the stock market has made selling volatility a lucrative affair, with ETPs such as the XIV and the ProShares Short VIX Short-Term Futures ETF, attracting about $3 billion in investment.

Monday's slump in the US stock market may have been painful for those betting against volatility in prices, but traders who took opposite positions hoping to gain from a sharp move are likely to laugh all the way to their banks.

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"The last two days of trading has thrown a giant bucket of cold water on the short volatility trade and I think we're now in for a prolonged period of elevated volatility generally", said David Lafferty, chief market strategist at Natixis Investment Managers.

VIX-linked ETPs' net short exposure hit a record high on Thursday, Omprakash estimates.

Even the short volatility instruments that survived Monday's meltdown still aren't out of the woods just yet.

Derivatives markets indicated, however, that the spike in volatility of the past few days would not be sustained.

A number of other institutional investors have also bought and sold shares of the stock.

The Cboe Volatility Index, or VIX, which measures implied volatility on the S&P 500, has more than quadrupled from the record low set late past year, but VIX futures contracts suggest the spike in volatility will abate over the next few months.

SVXY sponsor ProShare Capital Management LLC declined to comment. Credit Suisse didn't mention the ZIV in its announcement about the XIV. Janus Henderson Group plc, which markets the VelocityShares notes, could not be reached. The two products were short volatility, a bet against equity turbulence that traders have been piling into for years.

Industry participants have questioned whether certain products would have to be liquidated.

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