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Option traders continue to press the upside, oblivious of risk. The equity only ISE sentiment index hit 276 today. This implies that retail traders are buying calls vs. puts at an almost 3:1 ratio!
To say that this is rare is an understatement. While we’ve only had this metric for a little over 4 years, out of 1070 data points, only 2 other days showed a bigger daily call binge: June 15th 2007 (280) and October 8th 2007 (279).
Looking at the 10 day moving average provides us with 1061 data points - out of these, only 56 are equal or higher than the current 216. So more than 95% of the time, retail option traders exhibit less enthusiasm for the up-side over any 2 week time period. So clearly, being in the top 5% is truly extreme. Here’s a chart showing the daily and short term average of the ISE Sentiment since 2007:
The previous peak corresponds to the top of January 19th 2010 (10 day average ISE sentiment of 207). Going back further, there are two other extreme periods: mid 2007 and late 2007. We looked at the historical behavior of the stock market when there is a spike in the ISE option trading activity last month and it was not at all friendly to the bulls going forward: Option Traders Reach For Gains, Forget Risk Completely.
Since then the S&P 500 has tacked on another 4% in a melt-up. But if previous patterns of extreme optimism in the options markets repeat, those gains and more will be given back quickly. Remember that the market falls much faster and harder than it rises.
The CBOE (equity only) daily put call ratio is equally extreme. It ended today at 0.43 - implying that more than twice as many equity call options were traded than put options. So the binge is not restricted to just retail option traders. Large traders are participating equally in this extreme behavior. According to the always insightful Jason Goepfert, traders who bought 50 or more contracts at a time, dedicated 42% of their total option trades to buying calls. That is the highest level since early 2000 - at the height of the tech bubble. This is the sort of market that makes you reach for a thesaurus to find an appropriate superlative.
Today’s CBOE intra-day activity is also interesting. Here is a breakdown of it for equities (left) and for the S&P 100 (OEX) index (right):
While large option traders may at first seem to be the “smart money”, studying their actual behavior now and previously will disavow anyone of that. Instead it is usually the OEX option traders that we look at from a non-contrarian viewpoint. Juxtaposing the two different intra-day trading patterns therefore is intriguing because it shows that while “regular” traders were buying calls with both hands on stocks, these traders were actually skewing their index option trades towards puts - especially as we approached the close.
Finally, I’ll add that the breadth, as measured by the S&P 500 cumulative advance decline line continues to keep up with the market. Today it ended at 13579 (+329 for the day). But at this rate, the option traders are playing with fire and just begging the market to teach them a painful and unforgettable lesson about excessive greed.
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