LNA design question - series drain inductor
How is there any headroom for voltage gain when the DC drain voltage
  of M2 is equal to Vdd?


Plenty of amplifiers have inductors tying drain or collector to Vcc - all it means is that the average voltage on the drain must equal Vcc - it doesn't stop an AC signal being superimposed on top of the DC level at the drain.

Think about how this transformer connected common-emitter amplifier works: -



You could say that the transformer primary shorted the collector to Vcc but that's only at DC - the AC signal sits on the collector (at Vcc) quite happily. The collector voltage rises to nearly twice the peak of Vcc and falls to nearly zero volts.