There’s a “monster vibe shift” afoot across thematic macro trades, where last week’s round of soft US price data triggered a reversal in bearish / hawkish rates expressions and an about-face in consensus long dollar positioning.

As discussed here, that shift’s manifesting in the equity options space as flatter skew and put skew (i.e., less demand for downside protection) and steeper call skew (i.e., a bid for upside exposure).

The accompanying rally pushed the S&P back to a record on Wednesday, but it was notable that the VIX actually rose. The Nasdaq VIX likewise registered a small increase. That speaks to a little embedded irony in this nascent stock melt-up: If it looks like equities are poised to run away to the upside, you could start to see folks grab for exposure and in their desperation, push vol higher.

“[T]hose who’ve under-captured the rally or were over-hedged [are] contributing to some ‘chasing,’ with pockets of spot-up, vol-up in mega-cap tech, AI and semis, as well as IWM and GLD,” Nomura’s Charlie McElligott said Wednesday, adding that “the largest potential headwind for sustained vol-control buying now actually becomes more upside exposure chasing, in so far as this spot-up, vol-up may be indicating that the vol reset has found a floor, with higher highs in spot then bringing out more buyers of upside in ‘unstable’ fashion.”

Remember: Spot-up, vol-up tends to be a dicey conjuncture. Sure, rollicking rallies are fun, but all else equal, you’d really rather a slow-moving melt-up on low vol.

Apropos, still-sticky vol-of-vol reflects residual angst. “VVIX absolutely parked ~100 speaks to ongoing tension in the tails, with a wider distribution of outcomes remaining valid,” Charlie went on.

I’ve spoken at some length, typically citing McElligott, about the dry kindling dynamic in the VIX options space and also in the VIX ETN complex. In a scenario where the VIX stages an anomalous spike, dealers’ hedging needs (on calls they’re short to clients for whom VIX upside’s a preferred catastrophe hedge) and the EOD rebalance for exchange-traded VIX products, together have the potential to amplify a bad situation.

The updated figures, above, give you some context.

“Vega demand / supply dynamics are getting juicy again,” McElligott said. “In a VIX squeeze scenario, our calculations… show some chunky vega-to-buy on a potential +10 point VIX shock.”