“You simply have to short vol spikes in unemotional, mechanical fashion.”

That’s the muscle memory, Nomura’s Charlie McElligott reiterated on Wednesday, while editorializing around the post-CPI behavior of the VIX ahead of expiration.

Intraday on Tuesday, markets were treated to a what Charlie described as a dealer hedging “panic.” As the VIX accelerated up to and through 17, a large short call strike, a frantic rush for hedges ensued. Long story short (no puns intended) a lot of optionality which, pre-CPI, was (un)safely assumed worthless, moved rapidly and perilously towards in-the-money.

The figures above (click them to enlarge), along with McElligott’s annotations, give you a sense of the impact. 

But the dynamic abated even more quickly than it escalated. “VIX then cratered hard into the close as S&P puts and VIX calls were quickly sold and monetized,” Charlie said. “The VIX calls which dealers were just panic-hedging then lost delta into the cash equities close in precipitous fashion ahead of this morning’s expiration.”

As I put it on Tuesday afternoon, “at session highs, the VIX was up the most in quite a while, but with VIX-pery looming, it was hard to get a good read” on things. McElligott’s postmortem speaks to that. Importantly, he noted that the fireworks were “effectively confined to a VIX dealer convexity issue at one or two desks getting stopped-out… as opposed to any sort of massive, forced end-of-day cover of [the] overall short vol supply.”

Ultimately (and coming quickly to the quote used here at the outset), the backtest was too much to resist. And it says you sell vol on any material richening. Because it’s going to mean revert. There’s a Pavlovian response function at work here.

Charlie summed it up. “Volatility needs to stay fed with continued large spot equities moves in order to sustain higher levels,” he wrote Wednesday, noting that at yesterday’s intraday highs, the VIX was implying 1.125% daily spot moves. If equities can’t realize that, vol will collapse under the weight of those (implied) expectations. Everyone knows that, hence the vol-supply muscle memory. And that vol supply itself suppresses vol, in a self-fulfilling prophecy.