The market is “dominated by option sellers.”

That’s according to JPMorgan analysts led by Marko Kolanovic, who on Monday called volatility “artificially low.”

As discussed in the latest weekly+, realized vol collapsed this month into a very compressed range of daily closing spot outcomes. Through last week, the S&P had moved 1% or more on a closing basis on only one session in April. That’s conducive to an ongoing re-allocation bid from the vol control universe, which serves to further tamp down volatility.

“Pervasive overwriting and underwriting supply [kept] dealers absolutely stuffed with gamma, ‘insulating’ the market from gappy moves [with] a profound second-order impact [that] feeds back into significant mechanical re-allocation flows from systematic investors, whose passive demand then further compresses sell-off risk,” Nomura’s Charlie McElligott said Monday.

On Nomura’s estimates, CTA buying across global equities came to more than $80 billion since March 14. The vol control bid was $25 billion over the same period, according to the bank’s model.

“Selling of options forces intraday reversion, leaving the market price virtually unchanged many days [which] in turn drives buying of stocks by funds that mechanically increase exposure when volatility declines,” Kolanovic wrote, citing the vol targeting crowd and risk parity.

This is familiar territory for many readers, and as such conjures a Rolodex of familiar talking points and McElligott quotables. “Volatility is your exposure toggle,” and volatility is low. The rise of 0DTE options makes every session “its own ecosystem,” as same-day monetization, hedging and daily unwinding of directional winners creates a predictable “reversal flow” that compresses close-to-close vol in stark contrast to what, on some days, is pronounced intraday “lunging.” And so on.

It’s all self-fulfilling, and failing to grasp it leaves some fundamental, top-down strategists grasping at various straws to explain why equities remain resilient in the face of everything from a Fed intent on “higher for longer” to bank failures to a prospective US default.

As Charlie noted Monday, selling vol “has been relentlessly smooth and profitable” since March’s bank theatrics. The deposit crisis “created a hedging bid to fade, whether through selling one-month or dailies,” he remarked.

The VIX, meanwhile, is (or at least was) also in thrall of options-related dynamics and systematic flows+.

If you ask Kolanovic, the VIX is “dislocated from many perspectives,” including “relative to other option markets, relative to high short-term rates and… relative to the stage of the cycle.” He called low vol “an anomaly” that’s “unlikely to be sustained for long.”

This is reminiscent of last week, when Marko noted that “markets often bottom before the end of a recession, but not before the beginning of one.” JPMorgan still expects the macro to worsen over the course of 2023, and Kolanovic worries low vol is “artificially suppress[ing] perceptions of macro fundamental risk.”

Ultimately, JPMorgan called current levels of equity volatility “unusually low” given higher rates, tighter financial conditions, elevated macro risks and geopolitical tensions.

The next several sessions could be make or break for equities vol. The door is open to a wider range of potential spot outcomes following Friday’s OpEx and, as McElligott wrote, “this is the week for ‘earnings as a vol catalyst.'” Mega-cap US tech is on deck with results.