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QQQ skew


You're not supposed to tell them that!

Yesterday, the total put/call ratio from the CBOE closed at 1.31, one of the highest readings in its history. The immediate reaction is that it was a tremendous show of pessimism and suggests the market should go higher. However, QQQ options have become an increasingly large part of total option volume, and yesterday they accounted for over 50% of all equity put volume. The QQQ put/call ratio itself closed at an all-time high of 19 (meaning there were 19 puts traded for every call), but looking at the history of the ratio, it has no clear predictive ability - sometimes a high ratio leads to market rallies, sometimes it leads to market declines. Overall, it is more of a non-contrary indicator than contrary indicator, though.

For these reasons, QQQ options should be removed from the traditional put/call ratios to give us a better (but still not perfect) read on option trader sentiment. Doing so for yesterday's data gives us an equity put/call ratio of 0.54, which is on the lower side of its range. A 10-day average of this data gave a "buy" signal around March 22nd, but is now back to neutral. There are reasons to be bullish here, for sure, but please be careful about relying on the headline put/call ratio as one of them.

On a side note, the put/call ratio on 30-year Treasury Bond futures has averaged 0.36 over the past two days (meaning there were 3 calls traded for every put). While volume was light on Tuesday, it was quite heavy yesterday. The volume could be speculation on a poorer-than-expected jobs report, or it could simply be hedging against existing short bond positions, but historically the put/call ratio on bonds has been a relatively effective contrary indicator if there is persistently lopsided volume over the period of a couple of weeks or so. A 21-day moving average of the ratio was very high during February and early March, but has come down significantly over the past couple of weeks. It is not yet what I would consider extremely low, but another day of heavy call activity could push it to an extreme (suggesting bonds would most likely exhibit weakness going forward).
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