The last two months of market and volatility action is unparalleled. Usually, when the market rises, volatility falls -- since 2006, this has happened 90% of the time. The last two months, however, has seen a volatility rise connected to a market rise 25% of the time, more than double the historical average.
Historically, when volatility rises and the market rises, it has been a coin flip between the skew steepening, indicating put buying, or shallowing indicating call buying, both happening 50% of the time. However, in the past two months, volatility rising has come with a skew shallowing 73% of the time, indicating massive call buying.
Call buying is driving the volatility spikes and the real action is not in the index but in the single names, and the buying has not been in normal just out-of-the-money calls but way out-of-the-money calls.
Consider the lower graph in the chart of the NDX components weighted averages below: The ratio of the 75 delta 30 day options implied volatility to the 5 delta has not been at the level since 2008.
The 75/5 delta ratio hit its nadir in late August 2020 near the top of the market, but the call buying is continuing currently and driving this ratio down again.
Another effect of this call buying in addition to moving the skew is to accelerate market moves, and volatility, around the strikes being bought. This is because market makers when short calls and the market rising causes the calls to rise, must buy the underlying as a hedge against the options sold. The market makers are buying the market as it is going up and accelerating the move. This is called the gamma squeeze effect.
One way to see the gamma effect is to look at historical volatility. Historical volatility 5-day started to accelerate as the market zoomed up in late August. The historical volatility measured in 5-day periods hit 60% as the market fell off its highs. Presumably, what happened is the market neared the way out of the money strikes and caused a gamma squeeze.