Midday market 10/14: Stocks give up gains, US government suggests intervention and the market

US stock market had a strong shorts-cover rally yesterday with major indices rallying nearly 7% from low to high, one of the largest intraday reversals in market history.

General over-hedge activity by investors creates bearish bias in the market but also fuels the shorts-cover rally with SPY puts at strike 350 and 360 crushed hard throughout the morning due to the drop in volatility after the CPI report, creating positive gamma flow and forcing put holders to liquidate.

However, as Viet Hustler noted in yesterday's midday bulletin, this rally is entirely shorts-cover and though sharp, remains unstable with most organic buyers yet to appear as both call and put gamma declined yesterday.

By this morning, overall market options positioning has improved markedly with the gamma flip point moving up to 3700~SPX and most puts at 3500 and 3600 liquidated, creating less downward pull on the market but also weakening support at the 3600 area.