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Option Traders’ Bullishness Off The Charts at Trader’s Narrative





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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. As I wrote last week, 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 the CBOE equity only put call ratio was 0.32 - implying more than 3 times as many call options were traded for every 1 put option. That is the lowest daily reading in this series since the data was collected in late 2003.

A new daily low is definitely worthy of our attention, but what is truly astonishing is that the 10 day (or 2 trading week) average is also at an all time low: 0.454. This means that on average in the past 2 trading weeks, traders at the CBOE have bought 220 call options for every 100 put options:

CBOE equity only put call ratio Apr 2010

To find the next closest level of daily bullishness, we have to look back to January 16th 2004 when the ratio was 0.35 (or 285 calls for every 100 puts). By coincidence, that is also the next lowest reading for the 10 day moving average: 0.483 (or 207 calls for every 100 puts).

While this may paint an extremely gloomy picture for the equity market going forward, the short history of CBOE option sentiment is actually not all that bleak. We’ve only had a few similar periods of time when the 10 day moving average has fallen to comparable levels. These were:

  • January 2004
  • November 2004
  • July 2005
  • January 2006
  • October 2009

Most of the time, it resulted in moribund returns with the S&P 500 trading sideways to work off the excess bullishness. You can argue that the gains that followed October 2009 were given back quickly - returning the S&P 500 back to the 1075 level. It may be surprising that the market can maintain itself so well in the face of extreme optimism. But keep in mind that we are working with a small sample size. As well, all of them occur within cyclical bull markets, like the one we are in now.

This confirms the previous study of the ISE sentiment index extremes that shows the S&P 500 with a small negative return over the few months. But nothing like a break that results in major losses. This conclusion in turn, confirms the healthy and continuing cyclical bull hypothesis outlined by both Ned Davis Research and Lowry Research.

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9 Responses to “Option Traders’ Bullishness Off The Charts”  

  1. 1 GreenAB

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    thanks a lot.

    are you able to visualize the data discussed in this study?

  2. 2 Babak

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    GreenAB, that is looking at a small fraction of the option market (ETFs) and as it says, you don’t know if the trades are buying/selling but with the ISE the data is for small option traders who open a trade with a call/put buy. So that data is much more reliable.

  3. 3 grace

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    these p/c ratios are new lows RELATIVE to 2003 but CBOE data goes beyond 2003 and you will find lower 10 day p/c ratios than .45, especially at the end of the last decade. You shouldn’t really claim an all-time low when you’re not using all the data available. It’s misleading for readers.

  4. 4 Babak

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    grace, as I pointed out I’m looking at equity only - not total. You can find the data at the CBOE site.

  5. 5 grace

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    My comment was relative to the 10 day CBOE equity only p/c ratio, not the total. You claimed the 10 day equity ONLY p/c ratio was at an all-time low. The point I’m making, particularly for other readers, is that you only have data back to 2003 when in fact the equity only historical data goes back further than this.

  6. 6 Babak

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    grace, the CBOE site - which I consider the definitive source for this - has it only going back to 2003. Do you have a source for the data going back further? I’d be happy to consider it since it would provide us with more history to look at. Thanks.

  7. 7 grace

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    Not to be argumentative but the data is there, you just have to manually do the division. For e.g., as you instructed me to do, go to www.cboe.com From the drop down menu choose Dec 15, 2000– a random date. You’ll see the following figures near the top of the page:

    TOTAL EQUITY CALL VOLUME : 809,164
    TOTAL EQUITY PUT VOLUME : 738,472
    TOTAL VOLUME : 1,547,636

    You can take it from here.

  8. 8 Babak

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    Grace, you’re right - that is curious. I wonder why the spreadsheet then only goes back to 2003? Thanks for pointing this out.

  9. 9 Wayne W

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    Babak,
    Equity put call ratio was one of the first indicators I picked up on in the 80’s. Plotted it by hand for years. Marty Zweig wrote papers on the Put Call Ratio for Barrons in 70’s. I seem to recall that he did some of his Doctoral work on the subject. I personally read about it in a paperback book on Contrary Investing by an author I don’t even recall now. As alluded to in above comments, I remember eventually being frustrated because it was difficult to keep the indicator normalized because it’s mean tended to gravitate over the decades as hedge fund strategies, etc, started to utilize options for various purposes. I recently started watching it again, simply because it was at such extreme levels.

    I also recall that in 87 a couple of days before the crash, every short term sentiment indicator in the book including the equity put call ratio was at longtime lows, screaming buy, somewhat the opposite of today. Desperate times call for desperate measures. Shortterm indicators need to be put in context of the big picture.

    Different subject. Last 30 years, if April Friday expiration is down, following Monday is 2-8. Not a prediction on my part, just passing along information.

    I’m a spectator in my trading account, slightly bullish slant in my retirement accounts. See 5% correction as distinct possibility but believe we will work our way to more new highs in 2010. Just one man’s opinion, who has been wrong often.

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