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Minyan Mailbag: Dueling Options Markets

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Hey, that's a lotta hope!

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"It is worth noting the high put/call at CBOE (Chicago Board Options Exchange) is not at all what is happening at ISE (International Securities Exchange). ISE is now handling the bulk of options traffic, most of it true enough of the ETF variety. [The] reliability of the indicator (CBOE) may be waning and the ISE does not yet possess clarity either. Why?

CBOE handles most of the smaller stocks and oddly the big index contract options. ISE handles almost all the ETF options traffic and the more liquid stocks. CBOE tends to be the default exchange (or Amex if you get really unlucky) if you are an 'amateur' or smaller player without routing power. ISE is mostly for the big guns.

We may therefore see a disparity in readings which supports, for the moment, being more bullish as retail/small players are buying puts and the pros are taking on more open calls. The danger lies in ISE approaching a zone (now above 190, above 200 dangerous, 250 red alert) where in the past the market has topped. This is not a great timer, but the gut feel here is we are in the very late innings where retail (short) gives up and pros (way long) close positions, aka a prelude to a fade."

-Minyan Bryan

Minyan Bryan,

The total put/call ratio from the CBOE has indeed been quite high - it closed over 1.0 on Monday. However, much of that volume was in index options, as the put/call ratio on S&P 500 options was over 3.5.

If we're trying to guess who is trading these options, we're venturing into territory that I prefer not to enter. I don't really know who is trading the options at each exchange, so I don't want to base a decision off incomplete information.

What we can do, however, is get some better information as to who is trading what. Each week, the Options Clearing Corporation releases data which separates out all activity among various sizes of traders.

For the latest week, the data shows that the smallest of options traders, those trading 10 contracts or less, bought to open 2.5 calls for every put (this is the basis of the ROBO put/call ratio I've written about before). This is the most optimism shown by these traders since last December and is on the upper end of the range seen over the past few years (though they've been as extreme as buying as many as 3 calls for every put).

For the group trading the largest size, 50 contracts or more, they bought to open only 1.1 calls for every put last week - certainly not the kind of optimism shown by the smallest traders. Certainly much (most?) of this volume was due to hedging activity as opposed to what I believe is mostly speculative trading for the smallest traders, but it was still on the lower end of the range for these larger traders.

It could be that different types of traders have executions on the CBOE versus the ISE. If it is, though, I don't have any data to support it. What I do have, though, is hard data which shows that the smallest of traders are quite enthusiastic about higher market prices, while larger ones aren't necessarily joining in, and the disparity between the two is the widest since early June 2004.

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