For months (or maybe I should just say for the duration of the summer equity melt-up, however you care to date it), you didn’t need to be especially clever to make money shorting vol.

Stocks never sold off, and any meaningful move was usually on the upside, so you could make a tidy living just selling daily puts. Theoretically, anyway.

You didn’t want to be a call seller, though. There’s a fine line between a melt-up and a crash-up, and too often (from the perspective of overwriters) spot careened higher through short strikes.

In short (there’s a bad pun), it was a put seller’s paradise and a frustrating experience for strategies that sold daily calls.

Fast forward to August and the environment is shifting. “We’ve finally begun seeing a reversal of fortunes here over the past two weeks, where rationally in this spot index pullback, it’s now the call sellers who are theoretically making the money, while crowded put sellers finally see a drawdown,” Nomura’s Charlie McElligott said Friday.

Note from the table above that a strategy which sells 0DTE puts to fund 0DTE calls is the only daily, short vol options strategy on the S&P with a negative Sharpe. As Charlie noted, it’s also “the only [strategy] with a negative hypothetical PNL over both trailing -10-day and -20-day horizons.”

Why does this matter? Well, let’s walk quickly through it.

The impossible, Steph Curry-esque smoothness of this summer’s can’t-miss put-selling lured market participants to the trade, from the retail crowd to institutional investors. Everyone, McElligott went on, was “selling OTM puts to fund or credit purchases of calls” in an effort to grab some “cheap upside convexity” into 2023’s relentless stock melt-up. The associated flows “helped to squeeze markets higher on countless occasions in recent months, arresting early selloffs and rallying us into many a close,” he noted.

Now, as put-selling becomes less profitable (and thereby less attractive), the knock-on support from the associated flows may disappear. The loss of that automatic stabilizer could be particularly important in the event some catalyst finally triggers de-leveraging from the over-exposed systematic crowd.