You hedge downside when you can, not when you have to.

That was the friendly reminder from Nomura’s Charlie McElligott mid-week, when US stocks drifted back up near record highs despite a third day of tariff codswallop from Donald Trump.

The late-spring / early-summer equities trade developed largely as Charlie telegraphed. The resumption of vol-selling helped tamp down realized vol, while the three-month trailing measure began to inflect lower as April’s “shock” days dropped from the lookback, thereby facilitating a re-allocation bid from the target vol universe.

As the figure above shows, that re-allocation bid from vol control strats should continue apace over the next several weeks assuming relatively muted daily moves, and all else equal (e.g., $82 billion of projected buying out two weeks assuming spot stays in a +/-0.5% range, per the table).

Discretionary investors and the retail set, McElligott suggested, are now wise to that latent buy impulse and might’ve front-run it, thereby further skewing the supply/demand balance in favor of additional gains. (Remember: Stock prices are subject to the law of supply and demand just like all prices.)

Looking out a couple of weeks, the situation gets potentially trickier, though, and if vol spikes and spot equities starts to move around in a wider range, it’d throw off the systematic flow support. As discussed at some length in “What Could Go Wrong? Summer 2025 Edition,” we’re coming up on that challenging August seasonal and it looks very much like the macro-policy setup will mirror that which preceded last summer’s mini-crisis.

Charlie echoed that on Wednesday. “My best guess is that a good ol’ fashioned data surprise [will] act as the ‘shock’ catalyst at this point in the cycle, crystalizing the market’s worst fears of lagged tariff-driven stagflation at some point by late-summer,” he wrote.

The figures above show you the vol seasonal, both for implied (on the left) and realized (on the right).

“Seasonality in vol is about to bottom and then turn higher and even though the VIX options complex positioning is a snoozer right now, the leveraged VIX ETN net and gross vega position is at multi-year highs, implying a substantial ‘vol-to-buy’ on a VIX shock,” McElligott said.

Translated: Although there are no large open VIX call positions with corresponding dealer shorts which could compel market makers to buy VIX futures into a vol spike, those godforsaken levered VIX exchange-traded products are sitting with a lot of AUM which is an amplifier risk in the presence of a vol event.

The overarching point is that while things’ll probably be ok for the next two or three weeks, the door opens for a spicier trade in August. And with skew having snapped back flatter (i.e., puts cheapening relative to calls), the VIX in the teens and vol-of-vol below its one-year average (and ~80ppt below its April panic peak), this could be “an opportune time for looking at downside hedges,” McElligott went on, “especially with underlying equities exposure back higher as we head into July Op-Ex overlapping with the earnings buyback blackout.”

Coming full circle: Hedge downside when you can, not when you have to. (All disclaimers apply. Not investment advice. Consult your financial advisor. Don’t use this hair dryer while in the shower. Your results may vary; especially if you’re an idiot.)