The VIX is sub-20, one-month trailing realized vol’s sub-11 and measures of relative demand for downside protection on the S&P 500 and Nasdaq 100 suggest little in the way of selloff angst.

Given that, why is VVIX (i.e., vol-of-vol) hanging out near 100 and, more poignantly, why is VIX call skew nearly 100%ile on a one-year lookback?

Those aren’t the sort of questions most people ask themselves at noon on mid-summer hump days. A more typical question this time of day, at this time of year, might be, “Did that escort steal my Sky-Dweller?” as your right hand fumbles around a resort hotel nightstand, your face buried in a pillow lest the surge of photons angling in through haphazardly-drawn blinds should overwhelm your dilated pupils.

(Gotta keep it entertaining, folks. Otherwise people lose interest during these languid summer sessions.)

Leaving the resort humor aside (don’t worry, I’ll come back to it), the questions posed above are worth asking. The following charts give you some additional context for the odd market conjuncture I alluded to.

On the top left is asset manager VIX positioning. It’s virtually never been lower. On the right is weekly VIX ETN net flows. Those products are seeing redemptions. On the bottom is VIX call skew which, as noted above, indicates very elevated relative demand for OTM VIX upside.

A sticky-high VVIX is a sign of “tension” despite an 18-handle front-month VIX contract, receding realized vol and “extremely modest” equity index skew, Nomura’s Charlie McElligott wrote Wednesday, flagging the juxtaposition mentioned here at the outset.

“[We’re] nowhere close to a short convexity issue in the VIX space [due to the] lack of significant dealer short call positioning to general clients alongside chunky VIX ETN redemptions [but] similar to the ‘stickiness’ of VVIX, it captures my attention when I see VIX call skew being so curiously steep,” he said.

Charlie ventured an explanation: Dispersion traders are using OTM VIX calls to hedge their funding leg. Remember, the dispersion trade sells index vol to fund longs in single-name vol. It’s worked like a charm lately — record-low correlation goes hand in hand with record high relative single-stock vol.

But precisely because the PnL on that trade’s been so good, some might be looking to hedge. “There’s a preference right now for VIX OTM calls from the crowded vol dispersion trade, hedging for a ‘Corr 1’ convex move that would see their index vol short at significant risk, especially sitting at such extremes in singles vol versus index,” McElligott wrote, citing a colleague.

The figures above are a reminder: When he says “extremes,” he means it.

If some macro catalyst — or tape bomb in the form of a geopolitical shock — were to come along and trigger a wholesale move lower for equities, which is to say an index-level selloff that spares no one, the snapback higher for correlation would constitute a brutal reversal. OTM VIX calls are a hedge against that.

Of course, as mentioned here repeatedly in recent days, earnings season isn’t exactly known for high correlation. The opposite: Reporting season’s when the “micro” trumps the macro. But once we clear earnings, the VIX seasonal turns “scary,” as shown below.

“I know that mathematically, the concepts of seasonality and analog mash-ups are fairly viewed as ‘fake news,’ but as said concepts are socialized, along with structural reasons (like illiquidity and low risk facilitation into the August holiday season), these market phenomena can tend to self-fulfill,” Charlie went on.

I actually don’t think he’s giving this particular seasonal enough credit, even as he emphasizes that it can be a self-fulfilling prophecy. August is absolutely a low-liquidity month precisely because “important” people in the market making space tend to be on vacation. Hence less risk facilitation, wider bid-asks, bigger gap risk and so on, as the guy you need to talk to is passed out face-down in a pillow.

And that puts us right back in the room with the question that really counts. Wanting the most accurate answer possible, I presented ChatGPT with the third paragraph of this article, and asked it to ballpark the odds.

“Ceteris paribus, probably low — certainly nowhere near 50%. The fact that she’s an escort tells you very little about whether she stole anything,” the LLM said.

“The relevant variables are whether the watch is actually missing, who had access, whether you were intoxicated or careless and whether it was insured,” it added. “In this setup — stranger gone, Rolex gone, owner waking up confused — the probability rises materially, but that’s because of opportunity and circumstances, not ‘escort’ as a category.”

I pressed for more, wanting actual probabilities. After some wrangling, the model begrudgingly obliged: “Maybe 20–30% she stole it, 70–80% you left it in the bathroom, safe, pool cabana or another woman’s room.”