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Calling all puts


Say, maybe I'll just take a nap...for a few days.


Put/call ratios come in all sorts of shapes and sizes. Those with in-depth knowledge of the options market (Toddo and Professor Succo being prime examples) know the games played with options and tend to shun the traditional ratios that are readily available to the public.

Still, I find significant value in the data that is available to all of us, every day and free of charge, from the Chicago Board Options Exchange. Ratios based off this data has existed for years, and is common knowledge. It's hard to find something new that hasn't already been discussed at great length.

Even with that backdrop, the common put/call ratios that everyone can see are still some of my favorites. Over the past week, the ratio of total puts to total calls traded on the CBOE has been extremely high - so high that in the past it has led to a market low within days.

However, one troubling aspect about the high ratios is that much of it is coming from index options, not equity options. I do not take a contrary view of index option volume (simply pulling up a chart of it shows you why), so I have found the high put/call ratios lately to be more bearish than anything.

That began to change yesterday, finally, as equity option traders found it within themselves to pony up for put options. One of the simple derivative measures I watch is a 5-day average of the difference between the index option p/c ratio and the equity option p/c ratio, which is shown below. We can clearly see that when the ratio is low (meaning a high equity ratio and low index ratio), it has generally been bullish for the S&P. When the ratio is high (meaning a low equity ratio and high index ratio), it has been bearish.

As of yesterday, this spread between the two ratios is in the middle of the pack - not extreme in either direction. So, while the headline put/call ratios have seemingly been very bullish, digging a little deeper gives a different picture. Other measures I have researched suggest we will see a low of tradeable magnitude (say 5% in the S&P) within the next 5 - 15 days, but put/call ratios are not really one of them.

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