Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

What the small guy is up to



Below, John states that what he finds useful is trying to determine what type of attitude the retail investor has towards the market. One of the best ways to see this is by observing what type of derivatives they are trading. I don't care about lukewarm emotions - I want to see extremes of fear and hope. What better place to see those emotions at work than the most leveraged instruments available?

Fortunately, tools are available for us to observe this behavior. The great majority of casual sentiment observers look at the CBOE put/call ratios, which are only a part of the entire options market. The CBOE clears about 25% of all equity options contracts, which is less than the 30% now commanded by the electronic ISE exchange. If we branch out and look at all options exchanges (not just the CBOE), and narrow our search down to only the smallest of trades (pure retail trades of under 10 contracts), and narrow that down even further to trades that were bought to open, we can get an excellent read on what the small retail trader is up to.

The chart below shows the equity put/call ratio for trades under 10 contracts. The average premium per contract here is about $190, so we're talking a total value on the trades of between $200 - $2000. You can't get much more retail than that. Also, these puts and calls were only bought to open, not sold to open, which can skew the determination of whether the trader is bullish or bearish. There is really only one reason why a small trader buys a call - because he feels the stock is going up. He buys a put because he thinks the stock is going down. This is about as clear a read on small trader behavior as you're going to get, and as you can see below, these small frys have come off their most bullish readings (i.e. low put/call ratio) over the past couple of months, but are still nowhere near the levels of pessimism seen at the market lows in July and October 2002 and March of this year.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Featured Videos