Previously smooth Sharpes on short-vol trades are “getting chopped up” as traders see fatter tail risks, Nomura’s Charlie McElligott said Monday, upon returning from a two-week vacation which, on his account, took him “from Japan to Ohio.”

I’ve never been. To Japan. Now that I think about it, I’ve never been to Ohio either.

Mainstream financial media ran a couple of pieces late last week documenting a “perk up” (if you will) in volatility amid some evidence of renewed interest in downside hedges. On Monday, McElligott attributed the nascent vol “phase shift” to half a dozen factors (paraphrased):

• Ongoing US macro resilience, which is forcing…
• A re-pricing of the Fed funds trajectory, precipitating…
• Tighter financial conditions on the margins, all while…
• The market needs to underwrite this week’s reopening auctions, as…
• Corporates enter buyback blackouts around earnings season, and…
• Tax season implies liquidity drain to pay Uncle Sam (who’s “broke” and “needs” the money, if you buy those kinds of narratives)

All of that with a mission-critical CPI release staring everyone down.

And, so, realized vol’s moved up a bit. Charlie flagged five-day rVol jumping 10 vols from six to 16 last week.

Notably, skew’s awake. For months, the juxtaposition between negligible interest in downside hedges and demand for upside optionality to “protect against” a continuation of the melt-up served to pancake (that’s an action verb in this context) skew. Now it’s re-steepening, as illustrated below.

If you’re new to this, the figure on the left’s puts versus calls. On the right’s puts versus… well, versus puts: You’re essentially looking at a barometer for crash protection demand.

As you might expect given the above, call skew’s “off the boil,” as McElligott put it. That is: The frantic FOMO evidenced by ceaseless demand for out-of-the-money calls has calmed down a bit.

Of course, this all comes with the usual caveat: Vol spikes are difficult to sustain.

“[It] comes down to the behavior of the vol-selling universe [which] reflexively lean[s] into any nascent vol bid or spot downtick with crunching vega supply,” Charlie remarked.

That, in turn, “arrests and reverses the moves” in true Pavlovian response fashion.