Uh-Oh: VIX Explodes To 15-Handle After Call Volume Hit 3rd Highest In A Year

The VIX (you know, that’s that thing that under the current system isn’t allowed to trade in double-digits under any circumstances), has just spiked to a 15-handle – and beyond:

VIX

Don’t forget this warning from Marko Kolanovic (i.e. “Gandalf” tried to tell you):

Given the low starting point of the VIX, these strategies are at risk of catastrophic losses. For some strategies, this would happen if the VIX increases from ~10 to only ~20 (not far from the historical average level for VIX). While historically such an increase never happened, we think that this time may be different and sudden increases of that magnitude are possible. One scenario would be of e.g. VIX increasing from ~10 to ~15, followed by a collapse in liquidity given the market’s knowledge that certain structures need to cover short positions.

And then this from Rocky Fishman (who has been pounding the table on this for months, and months):

VIX ETPs are a larger-than-usual feedback loop in markets. Inverse and levered VIX ETPs’ need to buy VIX futures when vol is rising and sell it when vol is falling creates a feedback loop in vol that can lead to high vol-of-vol. Currently, the combination of low VIX futures levels (making an N-point vol spike look like a huge percentage), large short ETPs, and large levered ETPs leaves over $70mm vega to buy on a hypothetical 5-vol spike in the VIX futures curve

However, it is uncertain how liquid the VIX futures market would be after that kind of vol spike. The large amount of vega to buy may be hard for the market to absorb in some stress events, which may cause further exacerbation of a vol spike.

Some context:

Fire

And XIV (the financial market equivalent of a nuclear bomb) is now on pace for its worst day since the May 17 debacle:

XIV

Oh, and you should note that VIX call volume was the third highest in a year on Wednesday:

VIXCalls

And of course this is all set against the following absurd backdrop:

VIXShorts

“It’s probably nothing.”

******

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