Wall Street's fear gauge is ripping. Traders see it going even higher

The sell-off in AI-related stocks pushed the Cboe Volatility Index (VIX) above 22 for the first time in four months. A cluster of trades suggests it could go even higher.

In a series of eyebrow raising trades, investors purchased a number of November VIX calls that payoff if the index stays elevated through November. Specifically, one trader bought 9200 of the November 18, 20-strike calls for $1.7 million and 12,500 of the November 18, 23-strike calls for $1.1 million, wagering that the VIX will close above 23 by the third week of November.

"The speed at which VIX increased today, combined with elevated VIX options volume suggests traders are actively monetizing October VIX positions and rolling to hedge a larger market downturn. We note several +$1 million call VIX prints for November," said Brent Kochuba, founder of SpotGamma and a CNBC contributor.

Cracks in the AI complex and fears around neo-cloud provider CoreWeave caused the Nasdaq to shed 2%, its worst day since June 5th. CoreWeave lost 13%.

Of the top ten most popular VIX contracts to buy in Friday's session, nine were calls, and six were at strikes above where the VIX fell to after its initial spike. Nearly $27M in premium was traded across those nine contracts, or just about 36% of the total premium traded in VIX options on the day.

The market faces a key test next week when Tesla, SpaceX and Meta report earnings.