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Option Traders Go On Call Buying Binge at Trader’s Narrative

Option Traders Go On Call Buying Binge

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:

ISE sentiment call buying spike Apr 2010

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):

CBOE intraday option trading Apr 2010

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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15 Responses to “Option Traders Go On Call Buying Binge”  

  1. 1 jmpalaver

    Fascinating and very timely information — thanks

  2. 2 Ticker street

    Unfortunately, the market doesn’t tank soon after the ISEE hits high. It takes few days after, that is what the data reveal.

  3. 3 Ak

    Great post and great site - thanks!

    How do you think this fits in with the extremely bullish study on 90% volume up days taking place within 21 days of each other?


  4. 4 Wayne W

    Not sure, who your question was addressed too. But I personally am an intermediate bull looking for a 5% correction. The thrust signals from several different angles are too strong too ignore, however, the put call ratio, the 2 to 1 bulls to bears ratio in II sentiment, NDR sentiment index and the propensity of the Market to pivot in March, give me reason to look for a correction on the short term.

    But I don’t want to be short for too long.

    April Monthly Numbers

    Since 1950, April is up 68.3% (41-19) of the time for an average gain of 1.51% The 68.3% is second only to December and the 1.51% return is third (behind November and December)

    Mar-April Pivots

    Giving the intermediate bears a bit more hope, we had done some work that suggest that the market tends to pivot off the March direction. In years, where March is up by more than 4%, April is 3-4 for an average gain of only 0.21%. Only one (2009) of those 7 years was the April increase more than 1% after a strong March gain.

    Year Mar April
    1952 4.77 -4.31%
    1956 6.93 -0.21
    1979 5.52 0.17
    1986 5.28 -1.41
    1998 4.99 0.92
    2000 9.67 -3.08
    2009 8.54 9.39

  5. 5 Ak

    Thank you very much for the informative reply, Wayne.

    Well, let’s see what comes after the first 5%!

  6. 6 Gary Evans

    Thank you - very informative and somewhat alarming. Of course the S&P puts are probably hedges. I seldom go into the weekend without a put hedge or a strangle, even though my equity exposure is low these days. I refer to this market as “bull-creep.” It’s very strange.

    Again, very good post. I have to watch the $CPCE a little more closely I think.

  7. 7 Babak

    Today’s options activity was equally stunning. On a day when the equity market itself barely moved, the equity only ISE sentimen was 263 - meaning that for every 100 put options, 263 call options were purchased by retail traders as opening transactions. The 10 day moving average jumped to 221 - reminiscent of October 2007.

    The equity only CBOE put call ratio was similar to yesterday at 0.46 - implying 217 put options vs. 100 call options. In contrast, the OEX put call ratio was around 1.12

  8. 8 Wayne W


    Not only are they buying calls, but I noticed that VIX (16.23) closed today at it’s lowest level since October 9 of 2007, suggesting that fear of potential crisis type volatility has pretty much been priced out of the options for now.

    The current VIX is actually inline with historic norms, but you have to take notice when it hits an 18 month low. I haven’t seen a compelling study on the implications of such, but complacency is a bit to prevalent, even for many of us that are predisposed to be bullish.

    Babak, have you heard from Claussen lately? I seem to recall, he made a solid case for a correction a few months ago. I am a bit curious, if he is still fighting this?

  9. 9 biscosc


    I was looking at a chart of the VIX a while ago (very detailed research I know :) ) and noticed that whenever we reach new highs that are accompanied by a new VIX low then it doesn’t look like a top. It’s when we reach new highs and the VIX doesn’t make new lows that things seem to get dicey. This observation seems to be in direct conflict with what most people are fearful of (lower VIX). Just thought I’d mention it to see if it could make the to-do list. :)

  10. 10 Wayne

    stay tuned, I’m doing some analysis of VIX this morning. Babak keep an eye on your email.

  11. 11 Wayne

    A Study of Vix

    On March 6, 2010, VIX (Volatility Index) closed at 16.23, the lowest close since Oct 09, 2007. I was curious what the impact of such a drop in VIX could potentially be for the S&P. This morning, I downloaded the 10 years of data available to me from Prophet and made the following observations.

    1. Average VIX over the last decade was 22.97
    2. The lowest VIX was 9.89 on Jan 24, 2007 with the S&P at 1440.13
    3. The highest VIX was 50.17 on Mar 05, 2009 with the S&P at 682.55

    I looked at S&P performance as a function of the VIX level and couldn’t come up with anything statistically significant. I then looked at S&P performance as a function of the 3 month % change in VIX and there was some modest correlation between the direction of VIX and the S&P, but not anything worth writing home about. The one data point that I did find of particular interest was that on March 12, of 2010, VIX had declined 30% over the previous 3 months to a level of 17.58. There was only one other period in the last decade of date where vix was low, less than 20, and had declined 30% in a 3 month period and that was in Oct of 2007. Just one data point and not a prediction on my part, just sharing. Make of it, what you wish

  12. 12 Babak

    interesting Wayne, thanks

  13. 13 Ak

    Fantastic, Wayne - thank you very much for sharing!

  14. 14 Wayne W

    I’m not sure if we are using the same source of data, but I have my 10 day equity call put ratio at over 2.0 on both Thursday and Friday for the first time (over 2.0) in 2010. Vix closed at a 18 month low of 16.14 on Friday.

    I’m still looking for a modest correction of the 5% variety, but it’s a tough call this week as the April expiration week has a bullish bias and my instincts are the market will at least tickle the untested pockets of those short the April 1200 cls before Friday’s expiration, then maybe the meaningful correction that even a lot of flaming bulls are looking for. The market likes to gravitate toward levels that generate business and during expirations weeks that tends to be the round numbers where a lot of index option positions must be defended, if not completely offset.

    I noticed in the radio interview with Tim Hayes (NDR), that even though NDR has maximum exposure, they were looking for 10-15% correction soon.

    First tip of the bearish hand could be first sign that market stops going up on good news. I thought the unemployment # would be that opportunity. Let’s see how market reacts to what should be well anticipated good earnings announcements over the next couple of weeks.

  15. 15 Wayne W

    Opps, my oversight, I see where you addressed this weeks call put ratio in the sentiment review today,

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