Bloomberg – Equity Options Put To Call Ratio Highest In 18 Months

(Reuters) – The daily volume put/call ratio for equity options on the Chicago Board Options Exchange (CBOE) hit an 18-month high on Wednesday, indicating that investors are significantly bearish on the stock market.

At 0.99, which is equivalent to 99 puts traded for every 100 calls, the ratio is the highest single day close since Jan 15, 2009, the CBOE website showed on Thursday.

The ratio was near 0.55 on average earlier this year before spiking above 0.70 since mid-May.

In general, the put/call ratio moves inversely to the performance of equities. When investors are bearish and speculation in puts gets excessive, the ratio will be high.

“The fact that it’s not even near (options) expiration and we are getting this kind of sudden move is pretty significant,” said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research at Austin Texas.

“I have been expecting a real soft patch in the market from the beginning of May until at least July, and if you look back at what the market did in late January and in February of 2009, this might be signaling more downside. He added that he has been suggesting his clients to roll their positions out until August.

U.S. stocks extended losses for the sixth straight day on Wednesday on worries a slowing economy could deepen the market’s retreat. Wall Street bounced back on Thursday, with major indexes rising 1 percent, but the mood remained fragile.

Most equity options volume is traded by retail investors who bet on the upward or downward direction of the market, while index options are used more by institutions for hedges and other investment strategies.

“Individual investors continue to abandon the market at a rapid clip,” said Jason Goepfert, president of sentimenTrader.com in a report.

“The latest evidence comes from the American Association of Individual Investors (AAII), whose survey shows only 24 percent of respondents expecting a higher stock market over the next six months,” he said.

http://www.reuters.com/article/2011/06/09/businesspro-us-options-equity-putcallrat-idUSTRE75851V20110609

I am re-posting this article from Bloomberg because I believe that it is relevant to the commentary that I have written this past week. According to the article, the put to call ratio has not been this high since February 2009. Earlier today I noted that the S&P today snapped a 6 day losing streak. The last time the S&P traded negative for 6 consecutive days was also in February 2009.

These two points are key contrarian indicators and evidence that the institutions will not let the retail investor pocket the premium before options expiration. This is why I have been calling for a short term bounce in this market as the bears temporarily subside and take profits off of the table. Just be sure not to mistake this bounce for a reversal, we are still in a confirmed downtrend and the lack of volume is concerning as is the market’s inability to hold steady in the last 15 minutes of the trading session despite multiple buy programs that have been implemented.

Advertisements

About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: