Obsidian flow emplacement is a complex and understudied aspect of silicic volcanism. Of particular importance is the question of how highly viscous magma can lose sufficient gas in order to erupt effusively as a lava flow. Using an array of methods we study the extreme textural heterogeneity of the Rocche Rosse obsidian flow in Lipari, a 2 km long, 100 m thick, ~ 800 year old lava flow, with respect to outgassing and emplacement mechanisms. 2D and 3D vesicle analyses and density measurements are used to classify the lava into four textural types: ‘glassy' obsidian (< 15% vesicles), ‘pumiceous' lava (> 40% vesicles), high aspect ratio, ‘shear banded' lava (20–40% vesicles) and low aspect ratio, ‘frothy' obsidian with 30–60% vesicles. Textural heterogeneity is observed on all scales (m to μm) and occurs as the result of strongly localised strain. Magnetic fabric, described by oblate and prolate susceptibility ellipsoids, records high and variable degrees of shearing throughout the flow. Total water contents are derived using both thermogravimetry and infrared spectroscopy to quantify primary (magmatic) and secondary (meteoric) water. Glass water contents are between 0.08–0.25 wt.%. Water analysis also reveals an increase in water content from glassy obsidian bands towards ‘frothy' bands of 0.06–0.08 wt.%, reflecting preferential vesiculation of higher water bands and an extreme sensitivity of obsidian degassing to water content. We present an outgassing model that reconciles textural, volatile and magnetic data to indicate that obsidian is generated from multiple shear-induced outgassing cycles, whereby vesicular magma outgasses and densifies through bubble collapse and fracture healing to form obsidian, which then re-vesiculates to produce ‘dry' vesicular magma. Repetition of this cycle throughout magma ascent results in the low water contents of the Rocche Rosse lavas and the final stage in the degassing cycle determines final lava porosity. Heterogeneities in lava rheology (vesicularity, water content, microlite content, viscosity) play a vital role in the structural evolution of an obsidian flow and overprint flow-scale morphology. Post-emplacement hydration also depends heavily on local strain, whereby connectivity of vesicles as a result of shear deformation governs sample rehydration by meteoric water, a process previously correlated to lava vesicularity alone.