After several days of selling the S&P500 and other stock markets gamma squeeze higher. It appears to be a gamma squeeze play as options dealers were most likely forced to buy back short hedges. As implied volatility (e.g. VIX) goes down and put options are sold the delta of out of the money put options decreases (vanna). This means that dealers are over-hedged and will buy back those hedges. This pushes the equity market up, which leads to lower implied volatility, more puts being sold, and more dealer (stock) buying.
Our market model has dealers short gamma with the market below 2950. This means that dealers will push the market further in its prevailing direction. If the market is selling then dealers will push is lower. It also means that when the market snaps back up it will be a violent move.
Equity markets had an incredibly volatile day on 7/31/19 triggered by actions of the Federal Reserve. Its our view that the moves were exacerbated by the positioning of dealers in S&P 500 options. A quick wave of selling entered the markets just above 3000, pushing the market under our “volatility trigger” level of 2995. At this level we calculate that dealers were short gamma and therefore traded in large size, fueling the downside move.
There was a very large amount of volume supplied in this period as seen in the chart below.