- [Liz] Over the past few months,

volatility has ruled the markets.

Here's the S&P 500 on Thursday, June 11

when the index fell 6% in a single day of trading.

It was a rough day.

But not for everyone.

This chart from the same day shows the price

of UVXY, a fund that's tied to market volatility.

You can see, as the S&P tumbled, UVXY gained.

This fund in a type of volatility trade,

which is a kind of bet

that has lately attracted more investors and critics.

Analysts say volatility trading doesn't only benefit

from market turbulence,

it can actually make the swings bigger,

which could make markers riskier for everyone.

We'll explain.

To understand volatility trading,

a good place to start is the CBOE Volatility Index

or the VIX.

The VIX is known as Wall Street's fear gauge

and it basically measures market volatility

and it's based on options prices tied to the S&P 500.

- [Liz] The VIX tracks the price

of calls and puts, which are contracts

that allow investors to bet on whether stocks

will rise or fall.

When a lot of investors are expecting big swings,

that demand can drive up the price

of calls and puts.

For example, on March 16, the VIX rose by 43%,

a huge jump that led the index to a record close.

- So on March 16th, the market crashed.

Stocks had one of the worst days in history.

Investors were reaching for options contracts

throughout the day, driving up the prices

of those options contracts

because they expected more volatility in the future,

and that drove the VIX up.

- [Liz] Now, on that day,

traders were not only betting which way stocks would go,

they were also betting on which way the VIX would go.

That's a type of volatility trade

but there are others too.

In fact, there's a whole ecosystem of trading products

that allow investors to bet on how rough

or calm the markets will be.

Experts say these bets

and the hedging traders do to cover them

could be affecting the market in really big ways.

- So volatility started out as a metric

to measure the market

but now we're seeing thee products

that trade volatility and the whole host of derivatives

to trade volatility getting so big

that some analysts say

that they can actually influence the market

and drive more volatility.

- [Liz] This current stretch of market swings comes

after a decade of increased interest

in this type of trading.

Here's a look at assets in hedge-funds

that trade market turbulence

and here are assets under management

for exchange-traded products tied to the VIX,

like the UVXY.

You can see, the volatility business took off

after the financial crisis

and grew from there

as bankers devised new and risky ways to trade it.

Both charts mark 2020 as a record high.

- It's been a crazy few months

for the stock market

and we've seen some of the biggest swings

we've ever seen in history

and what that's done is actually that's drawn more interest

to these types of trades, the volatility trades.

That means people are putting more money

in these exchange-traded products

that bet on volatility.

- [Liz] For some investors and hedge-fund managers,

the strategy has paid off.

- One investor I spoke to,

his strategy's up more than 200% through May

while the S&P 500 has fallen over that timeframe.

- [Liz] Remember UVXY?

Here it is for the full year

and this is the spoke we showed earlier.

UVXY has had some big gains

but not everyone has won.

There have also been big downward moves,

leaving some investors with huge losses.

- We saw just this year professional investors

and professional hedge-funds that trade volatility,

some of them took some really big loses

or shut down entirely.

Look, these are really risky strategies

and it's important for investors

to proceed with a ton of caution

because it's definitely not a guaranteed win

for you to bet on market volatility

and even some of the most successful

and sophisticated investors

can have trouble with these trades

because they can be really difficult

to manage the risk associated with derivatives trading.

- [Liz] It's unclear how long this current bout

of market turbulence will last

but experts agree on something.

A more volatile market is also a riskier one.

(dramatic music)