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Option Traders Are Pushing Their Luck at Trader’s Narrative

Option Traders Are Pushing Their Luck

I’ve been sounding off a cautionary note as action in the equities market appears top heavy. But today it became obvious that the option traders are starting to really push their luck:

cboe put call ratio equity only Apr 2009

Although it is just one data point, having so much call buying that it pushes the ratio to double the number of calls to puts is rare. The last time the CBOE put call ratio was trading at 0.50 or lower was in December 2007 when the S&P 500 was at ~1500. You can see a more long term chart of the put call ratio in the above link.

And it isn’t just the option traders on the CBOE. The equity only ISEE sentiment index - which specifically measures retail option traders - came in at 203 today. That means 203 calls were bought to open a trade compared to 100 puts bought to open a trade. The last time this ratio was above 200 was December 30th, 2008 - just before the market took one too many sips of the bubbly and had the New Year’s tumble.

I’m a bit hesitant because there have been some data integrity issues with the ISE before. So to make 100% sure, I’ve contacted them to confirm the most recent number. If there is a change, I’ll write about it. Otherwise, the number stands.

If you’re new to this new method of looking at retail option traders, then this is a good introduction to the ISEE sentiment index.

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9 Responses to “Option Traders Are Pushing Their Luck”  

  1. 1 StockManiac2008

    First off, thank you for your blog. I am learning a lot from you.
    I wanted to point out a correction about ISEE sentiment index. Last time ISEE equities was above 200 was Mar 9th (201). On Mar 9th, ISE closed at its 52 week high of 220 (all securities), now we all know how things turned out since then.
    Hope you hear back from ISE about their data validity.

  2. 2 Paul Leung

    Also thank you for a great blog. I regularly read your articles.

  3. 3 jeremy

    Yes, many thanks, another insightful post.

  4. 4 Tim Sykes

    Do you mean Dec 2007?

  5. 5 Wes

    Another way of looking at these wacky ratios, are to acknowledge, that they may be hedges. It has become known that Goldman has been churning a lot of certificates

    If that massive amount of traffic, was Goldman getting set up large for the downside, then they would be hedging those positions with the most effective price point of out of the money call options. Perhaps what we are seeing is not a bunch of dopes lining up to get slaughtered on a reversal, but a large firm preparing for another leg down and managing their risk levels.

  6. 6 Jim

    One interesting source for options interpretation I’ve found recently is at the OCC

    The data is only reported weekly, but you can see the opened put and call positions for the 1-10 order size, which I imagine is a good proxy for how Joe Schmoe retail investor is playing options. Does anybody know of a source that charts the OCC numbers?

  7. 7 Babak

    I got word back from my contact at ISE - there was a correction for last Thursday: instead of 174 it is 153 (equity only). Today’s ratio came in at 206. So we’re continuing to see elevated call buying.

    StockManiac2008, you’re right, just by a hair. I actually mentioned this when it happened. This is really puzzling of course because the standard playbook is that the ISE ratio is contrarian but early March was the kick-off to the rally (?).

    Tim, no, Dec 2008.

    Wes, the CBOE numbers would reflect institutional trading but not the ISE sentiment index.

    Jim, the only source I know that uses OCC data is Sentimentrader by Jason Goepfert. I did a review of the site you can check out in the link. Anyway, he has a proprietary retail model called ROBO. The downside is that there is a bit of a lag to the data.

  8. 8 Brooklynnative

    I see greater than 200 readings on the ISE on the dates of April 13, 14, and 15. Maybe it’s not so reliable. I wish I had been buying then.

  9. 9 Babak

    I think the ISE needs higher numbers to be effective at finding extreme optimism. Somewhere above 250 definitely. Take a look at the highest readings and the subsequent S&P 500 returns here: ISE Sentiment Extremes & The Stock Market

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