Last week, in “Priced For Chaos When Nothing Ever Happens,” I again called readers’ attention to the yawning disparity between angst about what might happen “tomorrow” and what actually happened “today.”

As a quick aside, humanity “realizes” horrific outcomes every, single day and the 2020s have been particularly cruel in that regard. So when I say, quoting the incomparable Charlie McElligott, that “nothing ever happens,” I’m certainly not suggesting worst fears haven’t come to pass in the real-world context. Rather, this discussion’s about markets, and specifically the disconnect between index-level, close-to-close equity moves (realized vol, basically) and measures of expected market swings (implied vol).

Currently, there are a number of factors working to suppress index-level vol (e.g., the “offsetting” effect from diverging sectoral fortunes, thematic see-sawing and so on) at a time when headlines swear a crash is coming (i.e., if the war doesn’t get you, private credit or job losses surely will).

Fear of the apocalypse had the market over-hedged both through equity puts and VIX calls. Although stocks wavered intermittently in the face of daunting news flow from the Gulf, the Iran war manifested mostly as a vol event, with the VIX outperforming its relationship to spot equities and vol-of-vol doing the same vis-à-vis the VIX.

Insurance is costly. And, as McElligott noted last week, the market was “over-billing” for it amid elevated demand. If you care about your PNL (which is to say if your career depends on it), you won’t pay that premium unless you need it, and if the promised stock crash never materializes (i.e., if the war selloff instead manifests as a grinding pullback that leaves your wingy SPX puts and VIX calls far OTM), you’ll tend to shed those hedges before they bleed you to death. That’s what’s happening currently.

“Short-dated S&P downside hedges just keep coming off in waves,” McElligott said Monday, referencing the figure on the left, below.

I’d give you some color commentary but as you can see, Charlie beat me to both: The color(s) and the commentary. You’re looking at a “Biblical put unwind” on the left. On the right, you’re looking at diminishing potential for a self-fulfilling vol event (i.e., less dry kindling for a fire in the VIX complex, where built-in convexity’s magnified in a squeeze by dealer flows and those exchange-traded notes which probably shouldn’t exist.)

“[B]etween VIX options dealer positioning and VIX ETNs, the aggregate ‘vega-to-buy’ for [a] 10-vol [shock] is now down to just 48%ile historically,” Charlie went on. That’s the lowest since the post-“Liberation Day” unclench.

The bottom line is that absent a real gap lower for spot equities, crash / vol shock hedges aren’t needed and will be shed accordingly because, again, paying an insurance premium is a drag on performance. It doesn’t help from the perspective of rationalizing the cost that 2026’s market “mode,” if you will, is low single-stock correlation and high dispersion, a mathematical corollary of which is suppressed realized vol.

Meanwhile, the folks on the other side of those hedges are lovin’ life. As noted in the article linked here at the outset, the disparity between implied and realized vol’s great if you’re in the business of selling insurance.

“When [the] IV/RV volatility risk premium [trade] is this attractive, [the] ‘short vol’ Theta Gang continues to laugh their way to the bank,” McElligott said.

Vol-selling’s a good business until it isn’t, at which point Rudy Giuliani’s quip about the legacy of his friendship with Donald Trump applies. “I am afraid it will be on my gravestone. ‘He lied for Trump,'” Giuliani famously said, in 2018. “But, if it is, what do I care? I’ll be dead.”