I’ve written voluminously on the growing impact of ballooning AUM for derivative income products.

The vol supply overhang from the explosive growth in buy-write ETFs and other yield enhancement vehicles is meaningful and when considered with flows from more traditional sources, goes a long way towards explaining why vol expansions, which would anyway mean revert, tend to prove hopelessly fleeting.

On Thursday, I highlighted the latest from Nomura’s Charlie McElligott, who documented a nascent regime shift in the equities index options space. Long story short: Skew’s steepened sharply of late amid an uptick in demand for downside protection (and less in the way of interest in upside optionality), making it potentially easier to see a large drawdown given the read-through for dealer hedging flows in a selloff that pushes spot towards the strikes they’re short to clients.

If this nascent regime shift proves any semblance of durable, it could alter the market psychology behind the inexorable vol supply mentioned above, with game-changing potential. Or not.

“Despite this local vol regime shift, those options-selling / premium income flows [are] mechanical and the AUM is only growing in aggregate,” McElligott wrote, in the same Thursday note, adding that “if they start to lose AUM as market assumptions and behavior [shift], the absence of those vol-squelching flows could really change the game going forward.”

But that could be a tall order, which is to say those flows may prove difficult to dissuade and dislodge, which in turn means this most recent equities vol regime shift could be snuffed out and summarily put down like all the others over the past 18 or so months.

Charlie cited May 28 as “a powerful reminder of just how quickly we can reverse engines.” Consider the figure below.

As the chart text notes, that’s an intraday look at dealer gamma positioning. Spot was pinned — hemmed in on both sides.

The index “simply could not move” that day, McElligott wrote, calling that session “a pure expression of the suppression potentials from short index vol flows.”

“All it takes is some rates calm, soft data [or] a positive AI data point to get this flow re-stuffing dealers, making it impossible to move again and potentially arresting vol and skew,” he said.