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The Average True Range is an investor tool used to measure stock volatility.

"If you were looking to deploy into the equity market, premium levels have expanded, so using cash secured puts is a way to gain exposure", said Eric Metz, chief investment officer at SpiderRock Advisors LLC in Chicago. In after-hours trading Monday, XIV suffered catastrophic losses.

The trading range for the VIX, or the Cboe Volatility Index, on Monday was 17 points, much wider than the 10-point range the day global markets were shaken by Britain's vote in June 2016 to leave the European Union.

Tilly said he expected investors to continue to use short volatility strategies in the future, noting that there are many other ways for investors to express a short volatility bias without resorting to VIX-linked ETPs.

The product was devised in order to benefit from the calming impact on the stock markets of initiatives such as quantitative easing.

Janus Henderson Group plc, which markets the notes and owns the VelocityShares brand, did not respond to multiple requests for comment.

Both the VIX and the VSTOXX have drifted lower since early 2016, staying at depressed levels below their 20-year average for almost two years - until Monday's slide in US stocks. But for traders, it seems that's plenty of time for reflection as they look to similar products to profit from swings in the S&P 500 Index.

Normally, one-month futures contracts on the VIX trade at a discount to the spot price, a structure known as backwardation. Literally. You may as well go to Vegas and make casino bets.

When it comes to trading stocks, even veteran investors are prone to making mistakes. 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.

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"Even though at some point investors will show up to buy the dip in stocks, we don't think short volatility is a buy here", said Stephen Aniston, president of investment adviser Black Peak Capital, in CT.

"If you're a day trader, this is a huge deal".

The repercussions have been severe for some funds.

That sharp upward move in the VIX was ultimately the undoing for the VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and ProShares Short VIX Short-Term Futures ETF (SVXY), which are both created to provide single-day returns that are the inverse of the VIX.

Nomura Securities said earlier it would redeem its Tokyo Stock Exchange-listed "Next Notes" S&P 500 VIX Short-Term Futures Inverse ETN after a massive loss in the product.

The liquidation of the two products, which had about $2.8 billion in assets under management as of last week, is bound to have an effect on not only the VIX markets, but also on the broader markets, Aniston said.

Did volatility funds hurt the market?

This was the first serious test for these ETFs, most of which were launched after the global financial crisis.

The warning also served as a victory lap of sorts for Kolanovic, who had been warning about a volatility blow-up for months leading up to Monday's chaos.

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