Grinding, low-vol melt-ups are painful when you’re hedged for downside. And the summer just ended was, with precious few exceptions, just one long low-vol melt-up.

The September seasonal — which is historically unkind to equities — didn’t deliver for the bears, or at least hasn’t yet with just a few sessions remaining in the month. And now the Fed’s cutting rates again into an economy which, labor market softening aside, doesn’t look like it wants to roll over. If past is precedent, rate cuts into an economy that doesn’t fall into recession will beget still more equity gains.

All of that to say this is a tough time to be a bear, but even if you’re inclined to chase the rally, you should think twice before abandoning your hedges. So said Nomura’s Charlie McElligott on Tuesday.

The figure on the left, below, gives you a sense of relative demand for upside versus downside in options, with the flattening indicative of right-tail fear (i.e., demand’s skewed in favor of melt-up protection versus downside). The figure on the right shows you crash protection falling out of favor relative to at-the-money downside.

Suffice to say folks are tired of missing out, tired of burning premium waiting for a correction and unconvinced that any pullback which does eventually come calling will be anything other than shallow.

While all of that’s understandable, it’s just at times like these that caution’s warranted. Right now, there’s a bearish asymmetry lurking behind the scenes that’s under-appreciated except among sophisticated investors with the patience to parse the arcana.

The figure on the left, below, shows you de-leveraging scenarios for target vol strats (which, you’ll recall, dialed their equity exposure to the max over the summer as trailing realized slipped away into the single-digits) under various hypothetical spot outcomes. Do note: Vol control’s a seller in every scenario other than an unchanged market. Charlie called that “peak asymmetry.”

The charts and tables on the right show you the asymmetry vis-à-vis the rebalance needs across options and levered ETFs (the table on the bottom right shows you the single-name breakdown).

“In similar fashion to how systematic flows are utterly loaded for sell asymmetry into a vol squeeze catalyst, we too see the combined equities rebalancing / hedging -needs across aggregate options and leveraged ETFs being nearly 2:1 skewed towards supply, as well as potentially massive de-leveraging flow risk,” McElligott wrote.

What does all that mean, exactly? It just means that in the presence of a vol expansion and/or some trigger event that gets spot equities moving, the supply of equities (read: selling pressure) from these (mostly unemotional) flow sources would be potentially quite pronounced, both in an absolute sense and relative to demand for equities in an unchanged market and/or a continuation of the low-vol melt-up.

McElligott summed it up. “You can stay invested and ride this euphoric AI-induced virtuous feedback loop because it will continue to confound the haters and turn them ‘buyers higher’ as we are currently seeing, but even though it hurts, you cannot take your hedges off now, no matter how much they’re dragging performance,” he wrote. “There’s just too much potential for convexity to the downside at this juncture.”