In other words, if the VIX goes up by 50 per cent, the XIV goes down by 50 per cent. Over the past three years, with markets unusually calm, the price of XIV rose dramatically, from US$29.40 to peak at US$144.75, an increase of more than 390 per cent.
That all changed this week. On Tuesday night, XIV cratered more than 90 per cent, from US$99 to $7.67 US$6.
The dramatic plunge in the XIV triggered an automatic liquidation of the fund, with its issuer, Credit Suisse, activating an "irrevocable call notice". Investors will be handed back what remains of their cash for each unit on February 21.
Asked to provide proof of his losses, Lilkanna posted a screenshot of his trading screen, showing a net negative position of US$3.7m. "I guess you never expect it until it hits you," he wrote.
"You always hear stories about how people get cancer and how people get randomly killed in the street or about how they lose all their money, but sometimes you find it hard to believe that it will happen to you."
He explained that he started out with just US$50,000 and grew it to nearly US$4m in three years, US$1.5m of which was capital raised "from investors who believed in me".
"Went to the army for two years, got a small inheritance from my grand aunt that passed away, traded pretty well for the first year, raised a lot of capital from friends and family, continued to trade highly leveraged positions," he wrote.
"Started using more and more margin, started taking it less [and] less seriously, what could go wrong? Arrogance. Stupidity."
Adding to the pain, he said the "sad thing" was he was "long VIX until a couple of days ago". "I was sure there was gonna be a correction but with each passing day my conviction wavered," he wrote. "Stupid. Really f***ing stupid. I feel like such a fool."
On Reddit, fellow users sent messages of pity and disbelief. "Damn man, we're here for you," wrote Saevrcal21.
Passively-Aggressive wrote, "It may seem like the end of the world but tomorrow is a new day."
JPoor_The2nd added, "Tough luck man. You're still young. Ain't the end of the world."
UNoobIPro said: "Jesus dude, if you were able to turn US$36,000 into US$2.5m (even with raised capital), you can make back all the lost money and then some. You just have to learn from the lessons and give it time, you will make it back in no time. It sounds cliche as f*** but you know its true."
Others weren't as sympathetic. "Are you joking?" wrote Curryeater259.
"The entire reason why Lilkanna turned US$36,000 into US$2.5m was obviously dumb luck and gambling. If he actually had any talent/intellect, he wouldn't have put it all in XIV and short vol derivatives.
"He just got extremely lucky that equity index vol has been so low these past months and now the insane amount of risk he was being compensated for taking has shown its head (as it always does). He didn't understand that there is very little free lunch on Wall Street."
Matt Leibowitz, founder and chief executive of Stake, an online broker which allows Australian investors to access US equities and exchange-traded funds, said some investors had made a "lot of money" on the XIV over the last few years as volatility had come off.
"But the risk has gotten higher," he said. "There's no such thing as a free lunch anywhere, especially in finance. What you've seen is someone who unfortunately has not been aware of the risks."
Leibowitz said Stake, which has grown to more than 8000 users after launching last April, had in two days seen an almost 1000 per cent increase in traffic to Ultra VIX Short-Term Futures, a popular short-term US ETF which allows investors to make money even when markets fall.
"On the day everything fell, we saw people make quite a bit of money on some of these products," he said. "The big issue is in Australia, everything went down. Our users are probably a few steps ahead, they don't want to be trading in Australia with one hand tied behind their back."
WHERE TO GET HELP:
If you are worried about your or someone else's mental health, the best place to get help is your GP or local mental health provider. However, if you or someone else is in danger or endangering others, call police immediately on 111.
OR IF YOU NEED TO TALK TO SOMEONE ELSE:
• LIFELINE: 0800 543 354 (available 24/7)
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