“We all should understand that generic / naked vol-selling is the proverbial ‘picking up pennies in front of a steamroller’ trade,” Nomura’s Charlie McElligott wrote Monday. “Or, alternatively, Taleb’s ‘life of a Thanksgiving turkey’ parable, where a smooth glide path meets an unexpected outcome.”

McElligott was in the process of reminding traders that his penchant for highlighting short-term Sharpes for various vol-selling strategies is quasi-satirical and instigative on purpose.

The focus on hypothetical profitability for such strategies, and particularly for the 0DTE space, is “somewhat tongue-in-cheek,” he said. “Provocative by design in order to illustrate the absurdity of the recent glide path in this universe.”

The context, of course, is what I’ve called “indefatigable vol supply” in a market that can’t sustain even a minor correction, which makes selling puts seem like a “can’t miss” trade. That, in turn, can feed on itself.

Charlie on Monday described options skew and ATM vol as a murder scene, noting that SPX five-day realized sits at four vols now, and 10-day at nine.

As the figures show, three-month ATM iVol is 1%ile, 3-month skew 2%ile and three-month put skew 6%ile. “Running short vol in VXX is now posting a 12 Sharpe over the past 10 days,” McElligott remarked.

Again, the point is to draw attention to the inherent absurdity, but there’s an important parallel story: The rising popularity, and thus ballooning AUM, of yield-enhancement products and derivative income ETFs, which I’ve discussed here on several occasions of late, including in “The Big Impact Of A $60 Billion Options ETF Trend.”

The products themselves aren’t the problem. They’re covered call strategies. The issue is the effect they have on suppressing vol, which knocks on into re-leveraging and exposure adds in a world where everyone’s operating in a risk management regime that allows (or even dictates) “dialing it up,” so to speak, the lower vol goes.

As Charlie noted, overwrite ETFs can “perpetuate their own drag” (I’ll skip the specifics of that in the interest of brevity) by facilitating the very melt-up that pushes spot through their short strikes, and while that isn’t itself a risk for markets, it’s “absolutely helping to crush vols,” which in turn increases the risk of an accident down the road.

McElligott recapped the above-mentioned knock-on effect for vol control strategies. “The lower vol goes, the higher the exposure can be dialed up,” he wrote. In the presence of a meaningful vol catalyst, that big notional can get shocked lower — it can “tip over,” as Charlie put it, à la “Thanksgiving for the turkey.”

It’s not a coincidence that the turkey chart looks a lot like some generic (i.e., stylized) vol control exposure charts you might’ve seen over the years: Escalator up, elevator down.

But the larger risk, McElligott said Monday, is that thanks to the current crash-less equity environment, the backtest for put-selling “screens as ever more optically attractive,” which naturally entices more market participants to the trade.

“This is where we could get an eventual issue,” Charlie said, explaining that the crowd may “shift into a willingness to sell even wingier puts due to their sexier Sharpes,” and that, ultimately, “is how you turn a small down day into something much more negatively convex, due to downside accelerant flow potentials from the side of market which often isn’t in the business of actively hedging Greeks.”

But, it’s important (crucial) to remember that you do need a catalyst. A “skier’s scream,” if you will, to start the avalanche. “If you don’t get whatever ‘it’ is, owning gamma / vega will again be the wrong trade, and those hedges will be incinerated as event risk clears, which can then slingshot spot index even higher, as dealer hedges get unwound,” McElligott wrote.