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What Put Call Ratios Are Telling Us


We could have a similar pause to what we saw when Greece broke in January.

Back on Thursday, pre-Goldman (GS), we had one serious fly in the ointment to deal with. At least as far as the rally was concerned.

I'm talking Put/Call ratios. Traders Narrative has been all over the issue:

Option traders are down right giddy with optimism. Of course, this is nothing new. Last month it was the ISE sentiment which showed retail option trader reaching for gains, completely oblivious to risk.

Coming into this month, they have continued to press their luck with an astonishing amount of persistence. The call buying binge isn't even restricted to the retail option traders. ... institutional option traders are dedicating a huge amount of their total option positions to calls.

While the ISE data was extreme enough for us to take notice, the recent CBOE data is actually off the charts. Since I prefer to look at the equity-only put call option ratio, we have to contend with a much shorter history for this data series (as opposed to the total put call ratio).

Today (Wednesday) the CBOE equity-only put call ratio was 0.32 -- implying more than three times as many call options were traded for every one put option. That is the lowest daily reading in this series since the data was collected in late 2003.

Now I didn't agree with his characterization last week of a call buying surge, as it was really more of a put buying dearth. But call volume picked up, so it's now both.

I also prefer turning the numbers into 10-day rolling averages, mainly to weight the actual volume that trades. But even doing that, we're at very low levels. We hit 0.44 Thursday, before Friday's Goldman accident.

I find most value in put/call ratios when they tell a divergent story from everything else. The recent p/c really told the same story as the VIX, and the market in general. We got complacent.

That being said, complacency is a tough timing tool. We've looked pathetic for a while now. This should shake up the apple cart a little, but honestly, the VIX pop within this is kind of bullish. Maybe we have some pressure for a few days, but I kind of think we see a similar pause to what we saw when Greece broke in January.

Click Here to Read Adam Warner's "Trading Option Backspreads"
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