Investors lose big on products that bet against volatility

A popular Wall Street instrument used to bet against market volatility has blown up in investors' faces.

Swiss bank Credit Suisse said Tuesday it is winding down its so-called VelocityShares Daily Inverse VIX Short-Term exchange-traded note after it lost 91 percent of its value Monday.

The VelocityShares note was designed to bet against wild gyrations in the market, measured by the VIX, Wall Street's so-called "fear gauge." For years, the stock market was generally quiet so the VIX would trade at low values, making the VelocityShares note a popular way to make money in a low-volatility environment.

But that all changed Monday when the Dow Jones industrial average lost more than 1,100 points and was down more than 1,500 points at one point. The VIX jumped from a value of 17.31 on Friday to 37.32 on Monday, a more than 115 percent surge in one day.

The spike in volatility caused investors to flee the VelocityShares note en masse. Its value dropped from $99.00 Monday to $7.35 Tuesday.

Credit Suisse said it would liquidate the VelocityShares note starting Feb. 21. As the sponsor of the VelocityShares note, Credit Suisse had the right to wind down and liquidate the note if its value changed more than 20 percent in a day. It said its losses related to the note would not materially impact the bank's finances but didn't quantify them.

Credit Suisse wasn't the only Wall Street actor impacted by the sudden surge of volatility.

Another instrument used by investors to bet against volatility, the ProShares Short VIX Short-Term Futures exchange-traded fund, fell from a value of $71.82 to $12.24.

And shares of CBOE Global Markets, which owns the Chicago Board Options Exchange, fell more than 10 percent Tuesday on investor concern that the failure of products like the VelocityShares note might make other volatility-related products less popular. The VIX is owned by the CBOE.