What do you get when you combine moribund trailing realized vol with recently firmer implied vol?

You get equities vol that’s both alive and dead. Like that cat in a box. Not to be confused with the cat in the hat, which is something totally different. The first cat’s Schrödinger’s. The second cat’s Seuss’s.

I’ve talked at considerable length over the past three months about flat-lining rVol and the read-across for systematic equity exposure. Here’s the rVol chart. Again. Again, again:

Once three-month mechanically collapsed as the “Liberation Day” sessions fell out of the lookback, the windows with model “weighting” were uniformly insipid notwithstanding some fleeting excitement around this year’s installment of last year’s early-August growth scare.

If you’re keeping score at home, we’re looking at eight-handle three-month and six-handle 10-day and one-month. (Five-day sports a four-handle, by the way.)

Over the summer, I had an ostensible “quant” (he used that word in his screen name) ask me a dumb question about whether I was “sure” that collapsing realized vol presaged exposure additions (i.e., re-leveraging into equities) across vol-scaler strategies. Contrary to what friendly people will tell you, some questions absolutely are dumb. I don’t so much mind dumb questions (I ask them all the time in all sorts of contexts) except when they suggest the person asking them’s a liar. You aren’t a “quant” if you’re unsure as to whether vol control strategies deploy risk budget into receding rVol and vice versa.

Fortunately for my sanity, that reader later said something egregious about an unrelated topic which gave me an excuse to ban him. (And yes, I’m that much of a capricious asshole. If you ask me a dumb question, the odds of your being banned later for voicing an opinion I don’t like go up materially. I’m running an oppressive autocracy here. Don’t think of it as distasteful. Think of it as a microcosm: Practice for surviving in America in 2025.)

The updated figure below, from Nomura’s vol desk, shows you the modeled exposure add across systematics during the summer 2025 rVol collapse.

Simply put: Yes, I was sure. Sure that models which, by definition, allocate based on the realized volatility market would — wait for it — allocate based on the realized volatility market. Because that’s what they’re programmed to do. Hence the term “programmatic.”

So, rVol’s basically 0%ile, which means systematic exposure (and particularly vol control exposure) is 100%ile, but implied vol has firmed. Go have a look. The VIX is the highest since early August, and September was a “spot up, vol up” month in part due to the right-tail “grab-a-thon” I’ve spoken about recently.

That chase (i.e., longs in out-of-the-money upside optionality) “overr[ode] the downside hedge melt and perpetual options supply from the VRP crowd,” Nomura’s Charlie McElligott wrote, editorializing around what turned out to be a “SOVU” September, as illustrated below.

Do take a moment to read Charlie’s annotation. That’s why it’s there.

Coming full circle, what do you get when you pair rVol that’s been “absolutely destroyed” with nascent firming in implied and vol-of-vol? You get “Schrödinger’s equities vol,” as McElligott put it. And you also get a wonderful article title.

Oh, and in the same update, McElligott flagged a “resumption of tail-hedging demand in the VIX space last week,” which he explained by noting that for many clients, the current environment “feels unsustainable and unstable.”