Time and again over the past several months, I’ve revisited the post-SVB vol crunch.

This discussion can be as technical (or not) as it needs to be depending on the audience, but from a big picture perspective, there were three main factors in play.

First, the steps taken by Janet Yellen and Jerome Powell in March to prevent the regional banking scare from becoming a systemic problem were seen by the market as evidence that rate hikes or not, the vaunted “policy put” was still there. Second, the deluge of T-bill issuance unleashed by the debt ceiling deal has largely been absorbed through RRP transformation, mitigating reserve drain. Third, a decline in job vacancies continues to shoulder the burden of US labor market normalization, paving the way for disinflation without a surge in unemployment.

On Thursday, Nomura’s Charlie McElligott described the left-tail scenarios which could’ve been. The mini-banking crisis might’ve presaged a “Fed overtightening accident” and the bank drama could’ve “escalat[ed], knocking into a credit crunch.” The tsunami of bill supply could’ve resulted in a “liquidity drain shock.” And instead of so-called “immaculate disinflation,” we could’ve been treated to something else — a hard landing, for example, with an attendant jump in joblessness.

Thankfully, it all turned out ok, or at least so far. It went “right-way,” as Charlie put it. And, so, “vols / skew / gamma have been obliterated with what feels [like] a never-ending wave of vol supply from income / yield-enhancement funds, overwriters, underwriters and flows from systematic / VRP / total return players,” he wrote.

Three-month realized is now 0.8%ile on a 12-month lookback.

McElligott reiterated that this backdrop “has meant absurdly smooth” returns for short vol strats.

Moreover, the post-SVB regime was defined by persistent “crash-ups” (to the chagrin of call-sellers) and an absence of meaningful downdrafts. Weve seen “only grinding moves lower with little-to-no ability to follow through on selloffs,” Charlie went on, noting “remarkably low concern or demand for ‘crashy’ downside outside of very short-dated optionality.”

As the figures show, realized vol on down days for stocks minus up-day rVol is consistent with the lowest levels in nearly 40 years.

Does all of that suggest those hoping for fireworks are condemned to disappointment? Perhaps, but don’t despair entirely: “There is hope for at least some local vol chop and spot movement coming down the immediate pike!”, McElligott exclaimed.

This is a little technical, but to summarize, September is obviously a challenging seasonal for equities and as you might expect, there’s a corresponding VIX seasonal (shown on the top, below).

The figure above also shows the all-strikes gamma rolloff (so, not just the usual spot-adjacent rolloff), which is set to be the largest going back at least three years. The week after September OpEx shows stocks down 26 of 33 times going back to 1990.

The next logical thing to check is how stocks and vol (both realized and implied) have performed following the top quarterly OpEx rolloffs. The answer, from Charlie, is that the median one-week S&P return is -2%, the median one-week, 20-day rVol increase is 1.6 (vols, obviously) and for the VIX, the two-day forward change is 1.5 vols. 

So, again, there’s still some scope for fireworks.