On top of this, the implied volatility levels were very high going into the CPI report, rising to around 70% minutes before the print came out at 8:30 AM. By day's end, implied volatility for an at-the-money option dropped to approximately 40%.
Bloomberg
The sharp opening drop in the market and the high implied volatility led to options traders quickly starting to sell their puts, with the average weighted price jumping from around $7 per contract to more than $20 by the time the market opened for an October 13, 3,500 put.
Trade Alert/ CBOE
As options traders sold these puts, market makers were forced to unwind hedges and buy the S&P 500 futures, helping fuel the rally in the equity market. As the market stabilized and bounced off the 3,500, options for the October 13 trade date at the 3,600 strike price began to trade more heavily, which in effect, helped to fuel the rally further. As options traders began to buy these calls betting on the index bouncing, market makers had to hedge their positions again, buying S&P 500 futures.
Trade Alert/ CBOE
As the day progressed, the call activity shifted higher as the S&P 500 pushed higher. The 3,680 and 3,700 call options were among the most active trade contracts on the day.
Trade Alert/ CBOE
The combination of put selling and call buying resulted in implied volatility crashing and the S&P 500 rising. But by Friday, implied volatility had reset, resulting in the mechanical bid vanishing, allowing the sellers to reclaim market control.
Bonds Knew The Whole Time
Despite the mechanical rally on Thursday, the bond market understood the CPI data very clearly. Core CPI reached a new cycle high at 6.6% and up from 6.3% in August, while headline CPI showed minimal signs of cooling, coming in at 8.2% vs. 8.3% last month.