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Today It’s The Retail Option Traders Turn To Go Crazy at Trader’s Narrative





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Yesterday we looked at the CBOE put call ratio since it had gone off the charts. Today it was the retail option traders turn to go crazy:

ISE sentiment 10 day moving average Apr 2010 extreme

The ISE sentiment index is a slightly different way of looking at option sentiment since it is primarily focused on smaller option traders and it looks at option activity to open a trade. So by looking at the ratio of the ISE equity only call put ratio we get a much better idea of what retail option traders are doing.

Today they were the most bullish they’ve ever been. According to the intra-day activity, they started this morning with a call buying frenzy that took the ratio to 722 calls for every 100 puts. As the day wore on they calmed down a bit but were still buying more than 400 calls for every put. Then finally when the dust was settled, the daily call put ratio for the day stood at 348 - the highest daily close ever since we have data for this metric. That pushed the 10 day moving average to its highest ever as well: 249.

So option traders are even more bullish than they were in the summer of 2007 as the S&P 500 crested. The only caveat I can muster is that we have a limited amount of data since this data series was started in January 2006.

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7 Responses to “Today It’s The Retail Option Traders Turn To Go Crazy”  

  1. 1 Barry Ritholtz

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    Wow, thats quite the spike!

    Does it mean anything? Is it significant from a trading sentiment perspective?

  2. 2 Babak

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    Barry, the market doesn’t seem to do all that bad - at least looking at CBOE put call ratio extremes (check out the link at the top to see what I mean). Usually the S&P 500 just goes sideways.

    What is probably going on now is that people have been lulled into thinking that there is no volatility - look at the VIX. So why bother with buying protection for any downside? That could mean that if we do see the market correct, people will panic because they don’t have any insurance and will hit their stop-losses.

  3. 3 Clarence

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    Babak, thanks for the info. Is it possible to overlay the 10 day MA over the S&P or Nasdaq Comp?

  4. 4 Babak

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    Clarence, yes but I’m too lazy. Maybe next time :)

  5. 5 Scott

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    Does it mean anything? I think the answer is yes - it puts the professional vol desks short gamma to the upside, and they have to keep coming in and buying more as the market ticks higher. It can become a self-fulfilling prophesy.

    I’m not saying its the whole picture, but I think it helps to explain these slow grinds higher, especially the low volume late-day rallies we have seen (most derivative traders will hedge late in the day).

  6. 6 Clarence

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    Babak, no need to create an SPX - ISEE chart. Found the very thing I was looking for on evilspeculator.com

  7. 7 Roy

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    I think I would have to take the contrarian position rather then go with the crowd since we still have the Death Cross, Hindenburg Omans, The Vix sell signal plus the ongoing lies from those witin the gov’t

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