If you’re into nightmare scenarios, I’ve got one for you. I’ll keep it short, commensurate with what (I hope) are the long odds of it playing out.

Back in March, I spent a few minutes editorializing around what Bloomberg billed as “the return of the short vol trade.” The story was familiar to regular readers. I’m going to recycle some of my own copy in the course of briefly recapitulating.

“Short vol”‘s a catch all for any number of trades and strategies ranging from the esoteric to the wholly generic. In mainstream discourse, though, it’s almost always a reference to VIX ETNs and related products popularized during 2017’s short vol bubble, which burst spectacularly on February 5, 2018, Jerome Powell’s first day in the big seat.

That’s not this. And this isn’t that. The products at the heart of the new retail short vol trade are buy-write ETFs, which is to say ETFs that deliver capped upside on an underlying stock portfolio (or single stock) with an income overlay from a rolling short call. The flows associated with those products are meaningful.

Some worry the monthly vol supply from those products and other options-selling strategies is suppressing vol to a degree that’s conducive to “bad” behavior, which is to say leverage deployment and so on. Remember: Volatility’s famously “the best policeman.”

Estimates of that vol supply typically exclude the QIS universe and the dispersion trade. The latter’s a source of consternation to the extent it’s overcrowded, leveraged and opaque. Have a look at the figure below.

So that’s one-year correlation, and it’s the lowest since… well, you can take that index as far back as it’ll go on your terminal and you won’t see a lower reading, or at least I don’t.

Why does that matter? When correlation’s low it supports return dispersion. Falling correlations and high (or elevated) dispersion can suppress index-level vol. That, in turn, creates an exploitable disparity between surface-level calm and underlying churn.

How do you exploit it? That disparity, I mean. Well, you fund long vol in singles with index vol shorts. Or you might. Or you could. And some people do. Other people worry that those people are too smart for their own good. Kevin Muir, of “MacroTourist” fame, warned in March that the dispersion trade “has all the hallmarks of a crisis-in-the-making.”

This whole thing can become self-fulfilling. And that seems to be what’s happened. There’s likely a lot of leverage built up here too, given that the more crowded (extended, stretched, etc.) a trade gets, the more juice you typically need to get the same “oomph.”

In his latest, Nomura’s Charlie McElligott wrote that demand for VIX calls is still quite meaningful despite rock-bottom 10-day realized (sporting a five-handle).

“The thought remains that due to what feels like the ‘unstable’ nature of the ultra-concentrated index rally, the market is increasingly exposed to a selloff that will not be your ‘run-of-the-mill’ -5% / -7% / -10%-type correction move, but instead something more ‘crashy’ and ‘correlation 1’,” he wrote, tossing out a prospective earnings miss or poor guide from an AI heavyweight as an example of a catalyst.

In the event of such an “accident,” as Charlie put it, the “hypothetical nightmare scenario” could kick in “for the crowded dispersion trade, which [would] generically become a forced buyer of the index vol they’re short against their single-name long vol basket.” In other words: They’d have to cover their index vol shorts (the funding leg of those dispersion books) into an unfolding vol spike, exacerbating and amplifying the move.

As I joked in March: Somewhere in a cookbook there’s a recipe for disaster. The ingredients are RV, leverage and smart people. Critics like Kevin Muir are (or at least were) worried that there’s a lot of cookin’ goin’ on in dispersion pods.