Staff at Citigroup's municipal markets division worked in various locations that day, some from home, some from the bank's Manhattan headquarters and some from a backup office in Rutherford, N.J. Throughout the day, Citi representatives called finance officers in state and local government to deliver the bad news: Their short-term borrowing costs were about to spike. And longer deals were on hold.

Patrick Brett, head of municipal debt capital markets at the firm, was making his calls from a rustic house on a forested ridgeline in the Catskills. He booked the Airbnb in March a few days after the head of the Port Authority of New York and New Jersey, a major municipal borrower, confirmed publicly that he had tested positive for coronavirus.

That weekend Mr. Brett and his family left Brooklyn in a gray Chevy Suburban so packed with supplies that Mr. Brett's father-in-law had to balance a 12-pack of paper towels on his lap.

From a makeshift office, he spent Monday in back-to-back phone calls. That night, he would write his first of many crisis updates to state and local government finance officials around the country. In his mind, this was worse than 2008. "I don't think anyone alive has experienced anything more violent," he said in an email to the Journal.

Citi bankers had reached out to Larry Hammel, finance chief of the Forsyth County school district, the previous week as the muni market began to dry up. The district had planned to sell nearly $150 million in bonds on March 17 so it could keep construction going on four desperately needed new schools.

When Citi advised putting the deal on hold for a while, Mr. Hammel huddled with his chief facilities officer and the two men did the math. Without the cash infusion the district had expected from the bonds, construction would halt in July.

"It's one of those days where you just go home and say 'It's either going to be beer or wine,'" Mr. Hammel said.

He began discussions with a local bank about whether the district might be able to secure a bridge loan to keep school construction going. It wasn't until March 30 that the bonds eventually sold, largely thanks to government programs that brought markets back from the brink.

The liquidity panic quickly leaked into the stock market. Thomas Peterffy, chairman of Interactive Brokers Group, an electronic brokerage popular with day traders, had trouble sleeping Sunday night. He would wake up, grab his iPhone and get another dire update on where stock futures were trading. They dropped 5%, the most allowed in a single session.

By the time Mr. Peterffy started work on Monday morning from his home in Palm Beach, Fla., many investors had been forced to sell their positions because they didn't have enough cash on hand to maintain them.

He repeatedly asked his team how big the losses in clients' accounts were, which bets had soured, and how much money Interactive Brokers could be on the hook for if they didn't make good.

"As the day went on, more and more [positions] were liquidated," Mr. Peterffy said.

Adding to the tumult, Mr. Peterffy said, were the options bets against volatility.

For more than a decade, markets had been generally calm. A wildly popular bet for traders large and small was that they would remain so. But volatility had been mounting since late February. By March 16, it was at a roar.

The Cboe Volatility Index, known as Wall Street's "fear gauge," lurched higher during the day and closed at its highest level on record of 82.69.

It didn't help that the virus that morning had closed the trading floor in Chicago where many options are bought and sold. Old-fashioned trading using shouting and hand signals has dwindled for most markets around the country, but Cboe Global Markets' open-outcry pits are typically bustling with human traders.

Cboe had made the call to close the floor on Thursday as a precautionary measure, and executives spent Saturday working with brokers to test the all-electronic trading market ahead of its debut on Monday morning. The tests went well, but Sunday's selloff in stock futures had brought new complications, said Chris Isaacson, Cboe's chief operating officer. After S&P 500 futures hit their maximum decline, Cboe opted to delay the premarket trading.

While Cboe had sent most its employees to work from home that week, Mr. Isaacson went into the firm's Kansas City offices that Monday to monitor the market along with the technology and operations staff.

The stock futures selloff never let up, so options tied to the same benchmark remained in lockdown all Monday morning, waiting for the 9:30 a.m. opening. By then, Mr. Isaacson and his team knew what was coming next: "The market was going to have a rocky opening," he said.

Some options opened right on time only to be halted one second later, when the selloff on the stock market triggered its circuit-breaker.

"It was one of the most intense mornings of my career," Mr. Isaacson said.

Malachite Capital Management, a New York hedge-fund firm, didn't make it past Tuesday. On March 17, the firm said it would shut down, blaming the "extreme adverse market conditions of recent weeks." The losses were also extreme for others that traded on volatility. At JD Capital Management LLC, a hedge-fund firm founded by Goldman Sachs veteran J. David Rogers, the firm's Tempo Volatility Fund lost 75% or more for the month of March.

That same Monday, traders at Allianz Global Investors, a money-management arm of the German insurance giant, were struggling to restructure their own batch of disastrous options trades.

Allianz's Structured Alpha funds had been a big seller of insurance against a market selloff in the short term and a buyer over the longer term. The strategy produced a steady income, as the fund collected premiums from investors hedging against a downturn. The funds might lose money for a month during a selloff as they restructured those short-term trades, Greg Tournant, the funds' portfolio manager, said during a May 2016 marketing video, but over time they'd make money.

"We are acting like an insurance company, collecting premiums," Mr. Tournant said. "When there is a catastrophic event, we might have to pay -- very much like an insurance company. The positions we buy to protect ourselves from those catastrophic shocks -- you could label those as reinsurance."

When the big storm arrived in March, though, the strategy didn't work.

As options contracts swung dramatically, Allianz managers scrambled to restructure their trades. They struggled to keep up; the stock market was spiraling lower at a pace the managers didn't expect.

On March 25, Allianz informed investors that two of its Structured Alpha hedge funds that managed nearly $2.3 billion would be liquidated.

Allianz executives told investors that one of the funds was down about 97% since the start of the year, one person familiar with the matter said. Even after a March 25 conference call with Allianz, some investors said, they were still unsure what exactly went wrong.

Allianz didn't tell them how much money they'd get back, or when to expect it. One investor said he's still waiting.

--Heather Gillers and Gunjan Banerji contributed to this article.--Photo illustration at top by WSJ; Photo: Getty Images

Write to Justin Baer at justin.baer@wsj.com