Vol was obviously crunched hard into a truly raucous, post-election rally on Wall Street.

“MAGA mania” (if you will) was always going to be the most bullish super-near-term, knee-jerk outcome given markets’ penchant for equating Trump with “animal spirits.” Everything risk was bid, and small-caps predictably stood out, posting their best session since November 10, 2022, when a relatively favorable CPI report drove a broad-based rally.

Although the longer-term “best”-case for a low-vol regime was “Harris-Gridlock” (i.e., “safe” president unable to get anything done by virtue of an antagonistic legislature), the clearing of the election event risk — and, not for nothin’, the removal of the left-tail civil unrest outcome in a Trump loss — was more than enough to drive a massive mid-week vol melt.

As the figure shows, vol-of-vol (the white bars) evidenced a pretty profound tension “release.”

Nomura’s Charlie McElligott weighed in at some length. “With event risk in the process of clearing and policy clarity ahead, over-hedged SPX puts are now deeply OTM with their iVol cratering while right-tail hedge calls slide towards ITM,” he wrote.

Remember the election “seasonality”? The vol analogues I’ve been on about? Well, behold:

Past was precedent. At least for today.

So, downside hedges are bleeding out (badly) and upside optionality’s moving into (and through) dealers’ short strikes. What does that mean? Charlie spelled it out: “Vanna tailwind = > positive delta impulse ensues as dealers buy back their short futures with extreme violence, while cratering realized vols drive [a] mechanical bid from systematic vol control buyers.”

Modern markets, folks. As per McElligott’s maxim, volatility’s your exposure toggle. When vol gets crunched, exposure’s dialed up. And in this case with potentially more to come. “There are rationally large re-allocation flows into equities set to go through in the weeks ahead,” Charlie went on.

The figures are familiar. Three-month rVol is set to catch down. Those shock days from early August have rolled out of the window, and now the calculation will include Wednesday’s “crush.”

Of course, we do need to sustain the drop, which means avoiding any sort of shock in the other direction. Although it’s easy enough to forget given wall-to-wall election coverage, there’s a Fed meeting this week, which is to say we’re not out of the woods here quite yet and, as noted earlier, there will be a long-end reckoning at some point if Trump and the GOP push the fiscal envelope too far. Wednesday’s 30-year sale went ok but… well, 20bps is a helluva concession.

Coming back to equities, McElligott flagged an extra bullish kicker, reminding market participants that “nobody in [the discretionary set] has enough exposure on with net leverage too low,” which means those folks are now getting forced into a “FOMO chase.” And just as the corporate bid comes out of the blackout.