“What’s going on with the VIX?!”

That’s a question I’ve heard half a dozen times at least since late last week.

The tenor of the inquiries escalated on Monday, for obvious reasons. The figure below uses the August 5 high print on Wall Street’s “fear gauge” for maximum dramatic effect.

The damn thing nearly tripled from Friday at one point during this week’s earliest trading, when it was up more than 40 vols.

I don’t want to numb any minds with the tedious specifics, but as I wrote to a curious reader over the weekend, some of what’s going on is surely dealers getting stopped in as the VIX spirals higher into their short strikes. The knock-on effect of that (i.e., the associated flows) makes the situation worse. And immeasurably so in this instance.

In a Monday noted called, aptly, “Flames,” Nomura’s Charlie McElligott reiterated as much, describing a VIX complex where dealers’ short calls were “getting nuked,” forcing them to “cover their short gamma [and] buy back awful amounts of vega, feeding the de-grossing moves seen across strategies and risk-premia.”

“We’ve seen rolling waves of demand for VIX upside calls as the tail-hedging weapon of choice as investors were hedging for something beyond just a standard -10% correction in S&P puts and instead anticipating more of a shock-down ‘convexity event,’ which VIX calls would capture,” he went on. “Well, here we are as anybody short that VIX upside got massively stopped-in.”

Yes. Indeed. The figures below give you a sense of what that dynamic looked like and what it entailed late last week (click them to enlarge, obviously).

Charlie described an “enormous” vega buy-to-cover, leading directly to “absolutely wild vol outperformance [and] enormous PnL volatility for a number of dealers.”

In the “normal” course of business — and I emphasized this several times over the weekend — this vol rip / equity dip would be a screaming sell / buy. That’s the muscle memory. That’s the classical conditioning established over 14 years post-GFC, and rewarded time and again post-pandemic.

But liquidity’s poor this time of year, the August seasonal’s challenging (both on the VIX and from a “fundamental” equities flow perspective), and in case you haven’t noticed, there’s a recession panic afoot.

So, who knows this time. As McElligott put it, “the danger of course is that we simply aren’t done yet and that ‘first movers’ looking to short vol get their remaining fingers blown off.”

Read more: Vol Complex Goes ‘Bonkers’ Into Stock Plunge