This’ll be a little esoteric for some readers, but that’s ok: Esoterica’s part of the allure. I learned that from a bucket shop veteran-turned tabloid tycoon. (And no, that’s not gratuitous. I could conjure less flattering bios for the only boss I’ve ever had and besides, most people never get to be any kind of tycoon.)

Vol supply was heavy indeed to start the new week, underscoring the notion that the post-GFC classical conditioning (which says every equity dip’s a no-questions-asked “buy” and every vol rip a no-brainer “sell”) is so deeply entrenched in the market’s collective psychology that only acute, existential shocks are sufficient to overcome the ghost of Pavlov.

In a Tuesday note, Nomura’s Charlie McElligott described (and quantified) escalatory equity vol-selling from investors “looking to exploit ‘rich’ levels of optionality” precipitated by this month’s fleeting bout of risk-off sentiment.

Recall that the drama began with Donald Trump’s October 10 China flip out. Although he promptly “TACO’d,” the cautious mood simmered thanks to Jamie Dimon’s already famous “roach” quotable and the disclosure of alleged commercial mortgage fraud in SoCal.

The accompanying vol expansion was a rare opportunity, and traders jumped on it.

The simple vol term structure charts above give you a sense of how quickly things have shifted since October 16, when a sharp drop for US regional banks rattled investors anew.

As McElligott was keen to emphasize, the vol supply matters, and it matters a lot. “Because it stuffs dealers and market makers on gamma, in turn allowing markets to absorb deleveraging flows,” he wrote, noting that headed into the close on Monday, the total gamma imbalance in SPX options was nearly $11 billion per 1% spot move, which in English just means it would’ve taken a veritable catastrophe to overwhelm the market’s structural capacity to absorb a bearish shock.

That point’s illustrated on the left, below. As you can see, the imbalance — that shock absorption capacity — ranked nearly 100%ile going back five years.

The figure on the right shows you the one-week gamma imbalance specifically for very short-dated optionality. “Similarly, we saw resumption of large 0DTE options selling flows [marking] a change from that early-month ‘spot up, vol up’ dynamic,” Charlie said.

The English version of that says that on the whole anyway, the “grab” for upside exposure which had folks paying up for rally “protection” has given way to a “carry mentality,” as Charlie put it, wherein investors are inclined to sell vol to harvest premium rather than pay for right-tail exposure.

The mirror image is profit-taking and/or hedge abandonment on the VIX side, where calls were unwound and, McElligott went on, the long vega from VIX exchange-traded products “has been meaningfully reduced between redemptions and rebalancing requirements.”