During the three-month selloff in US equities from August to October, AUM growth for ETFs with embedded options-selling strategies was the weakest of 2023.

Those products, you might recall, watched their assets grow from essentially nothing prior to the pandemic to around $60 billion this year. They come in different flavors, but generally speaking, I don’t see the point in the current environment. You own the “underlying” simply by owning stocks, and you don’t need to sell options to generate income when your T-bills are earning in excess of 5%.

Anyway, AUM growth for yield-enhancement/derivative-income products decelerated sharply in August and nearly flatlined altogether in September. October wasn’t much better.

As the figure above (from Nomura) shows, things picked back up again this month amid the rekindled “everything rally” and an attendant fillip for options-selling performance.

“It shouldn’t be any wonder that we’ve seen fresh all-time highs in options-selling strategy ETF AUM,” Nomura’s Charlie McElligott said Monday. “After the FCI tightening period from August to October, we’ve seen a powerful resumption of AUM growth in November, as VRP continues to look attractive.”

The harvesting of vol risk premium can become self-fulfilling. McElligott described “hate-selling” in US equities index vol, leaving dealers “stuffed on both ATM and downside gamma.”

That suggests markets are insulated from a selloff. (On the other side, Charlie noted that “there are pockets of short gamma to the upside that could feed accelerant flows” in the event spot manages to rally further.)

Of course, the more compressed the daily range (i.e., if the above-mentioned downside buffer serves to narrow the outcome distribution), the more pressure on realized vol. And as realized grinds lower, it creates a latent bid from the vol control space.

The figures, with Charlie’s annotations, tell the story. Realized moved higher and vol control de-risked. Now, realized is moving back lower and vol control is dialing up their exposure anew.

“After shedding nearly -$90 billion of US equities over the past four-month period on the late-summer / early-fall rVol expansion, the hard collapse in short-term SPX realized volatility sees the medium-term trailing rVol windows catching down too, which we estimate to have generated around $22 billion of US equities buying last week alone,” McElligott said.

In the absence of a vol catalyst (which at this point is very unlikely to come from central banks in December), these dynamics can easily continue into year-end, particularly if the bond rally continues and rates vol stays contained.