Not everyone got crushed when the market collapsed.

For traders at a little-known Denver hedge fund who saw it coming, it was the score of a lifetime — a $17.5 million payday on a $200,000 bet.

“People were laughing at us, saying this could never happen, this should never happen,” Justin Borus, the 41-year-old founder and manager at Denver-based Ibex Investors, said in an interview. “We saw people pricing this as a 1-in-5,000 event, but it was more like a one-in-five-year event.”

Borus’s team bet that an exchange-traded fund linked to a calm stock market would go to zero in the event of suddenly volatile trading. The ETF almost did — it lost 96 percent of its value.

Borus said they always believed in the wager, even when just about no one else did. But the jackpot still caught them by surprise. Two of the group — Ari Rubin and Cooper Stainbrook — were taking a long walk around the Colorado capital when the market started to go haywire on Feb. 5.

As they walked, the two of them — Ibex’s director and chief data scientist — were on the phone with a client and in passing mentioned rare, so-called black-swan events. The client told them to check out the VIX Index. One was happening as they spoke.

Extreme Velocity

“We came back to our screen and we’re watching the VIX and it’s moving with extreme velocity,” said Rubin, a former Israeli Defense Force soldier and ski bum turned money manager. “We’re laughing at every tick up until we realized what was going on. Cooper just looks at me and goes, ‘Oh man. The Vol-pocolypse just happened.’”

What was happening was the biggest plunge for U.S. equities in more than six years. Concern inflation was seeping into the economy triggered a decline in the Dow Jones Industrial Average that reached 6.3 percent at its lowest level. The benchmark index for equity volatility rose to more than twice its level the day before, crushing bettors who’d gotten used to years of very low volatility.

For about a year, Ibex had been buying options on the ProShares Short VIX Short-Term Futures ETF, ticker SVXY. The executives wouldn’t comment publicly on the exact mechanics of the trade or its profit, but they were detailed in a research note published by an adviser to the firm, Pravit Chintawongvanich of Macro Risk Advisers. Owning the contracts fit into the 15-year-old fund’s niche-product strategies. As of January, the 20-person firm managed about $350 million.

Volatility Spasm

Ibex’s plan was to profit when five years of a record-calm stock market burst into a spasm of volatility. Exchange-traded volatility notes that rose when volatility fell looked like a particularly ripe target, given the potential for a feedback loop that might send the Cboe Volatility Index surging in the event of market stress.

Other investors may have been lulled by the years of relative serenity in the stock markets. The average volatility rate for 2017 was lower than every single trading day from Dec. 22, 1995, to June 20, 2005. The VIX finished below a level of 10 — super quiet! — on only nine days before May 2017 and 68 days since.

That’s why so few have dared bet against short-vol, which had been minting money with breathtaking consistency. Even retail traders bought inverse VIX ETPs, hoping to make a quick and easy buck. That’s what intrigued Ibex.

Laughed in Their Faces

They went shopping for the right derivatives to place their bet. Brokers responded with ridicule — options speculating the inverse VIX would go to zero would never pay off.

“Cooper and I go to New York a lot,” Rubin said. “In one instance, someone actually laughed in our faces at the type of options we were looking at.”

On Jan. 2, the managers put down $200,000 on what looked like a lottery ticket, with each SVXY put costing 34 cents. On Feb. 6, they sold the 6,300 contracts at about $28 each, leaving them with $17.5 million.

The firm had been in frequent contact with MRA’s Chintawongvanich, who’d been warning that the VIX notes could blow up for a while. Ibex was one of the few clients who actually heeded his warning, he said.

“Before this happened, I looked like the boy who cried wolf,” Chintawongvanich said. “There’s a risk that was underpriced by the market which we’ve been pointing out for a long time, and one of our clients capitalized on it, and I’m really happy for them.”

Ibex gives partial credit to a view of the Rocky Mountains outside the firm’s window. They’re 2,000 miles from New York and the conventional wisdom that said VIX ETPs could never blow up.

“The traditional mutual fund and hedge fund business is toast,” Borus said. “Most people investing in equities are going to index funds and ETFs. We believe in different strategies with higher risks and higher returns.”

After a sleepless Monday night, Rubin and Stainbrook celebrated by going skiing.