For the better part of a dozen years, the implicit message from central banks to investors was: Be long assets. And with leverage, if you like.

That changed when inflation took off, and for most of the tightening cycle, key investor cohorts were on-again, off-again under-positioned, leaving some to chase the market higher during melt-ups.

Late last year, I suggested (repeatedly, and typically in the context of frequent reminders from Nomura’s Charlie McElligott) that flat skew evidenced the same persistent under-positioning despite many observers pointing to fund flows (i.e., EPFR updates) and individual investor sentiment (i.e., AAII) to make the case that positioning was stretched.

With that in mind, I wanted to briefly highlight the two figures shown below.

The top pane shows index call skew, and the bottom is dealers’ gamma profile. The annotation is from McElligott.

Look at the %ile rankings in the top pane. That’s indicative of “extreme demand for wingy index upside,” as Charlie wrote. In other words: Demand for upside optionality in case of a big bullish overshoot. It’s indicative of investors fearing a runaway rally. And when do you fear that? Well, when you don’t have enough underlying exposure on.

The bottom pane is a reflection of the same thing. “Dealer gamma positioning [is] incredibly abnormal,” McElligott wrote. “By and large, they’re long puts from client selling to them, while for an ‘up-in-spot’ move, we see dealers short calls to clients, due to [the] fear of a crash-up.”