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Option Gauges Spike, Suggesting a Short-Term Low


Recent action in the options market implies that the major averages may not fall very far, if at all.

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The main option gauges, the VIX (INDEXCBOE:VIX) and the put/call ratios, spiked sharply last week, suggesting stocks might have put in a short-term low.

The VIX surged some 35% to its highest levels in four months. But a more telling flight for portfolio protection was the surge in the put/call ratio. In a recent article, I noted that the low VIX was a merely a reflection of low realized volatility and the fact that futures had maintained a premium suggested there was an expectation for an increase in volatility with an accompanying sell-off -- the upshot being that there was not widespread complacency. 

Likewise, the put/call ratio, while relatively low for equities, had remained robust on the indices, indicating money managers were maintaining broad market protection.

Last week, a few of the put/call ratios on both the equity-only and index products jumped to yearly highs. The ISEE reading (which is a call/put) dropped from its 20 dma of 200 down to 45, its lowest reading in over a year.  

This type of spike and rush for put protection can act as a safety net and might provide a short-term low and prevent the decline from accelerating too quickly or deeply.

Twitter: @steve13smith

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