SFO Magazine just had an interesting article on the nuances of the put/call ratio, how its reported, etc. You may want to check it out. Sorry I don't have a link but it should be on their website somewhere. It seems that the simple fading interpretation has fallen off in effectiveness over the last two years or so for this ratio. At least this is the case for my system tests. I have read that detrending the data may prove useful. Is anyone trading put call ratio systems effectively? I wonder what other long term staples in the sentiment indicator arsenal have fallen off recently. Anyone care to share their systems failures?
Why would anyone place ANY significance on the last 2 days of trading, especially when option volume dropped off dramatically?
One can see that 204,816 equity puts traded yesterday, and 213,912 equity puts traded on Monday. This is compared to the 481,898 equity puts that traded on Friday of Triple Witch this month, and the 507,688 that traded today as of 3:00PM EST. Also notice that there was a fairly significant uptick in the amount of Index Puts that traded as well, compared to the last 2 days. In otherwords, consider today's volume as if it was an Expiration, with lots of year-end hedges being unwound. http://www.cboe.com/MktData/default.asp Happy New Year!
tHANKS wAGGIE for analysing the numbers. That's a lot of puts. Very interesting indeed. Don't they always have to buy back those short equity positions?
I'm simply saying that there most likely was a lot of PUT volume in constrast to equity call option volume as a result of a year-end EXPIRATION. Collars and customized hedges for clients that expired on December 31st. Thus, the volume in puts today most likely smells of an EXPIRATION. Thus, I would not take the "spike" in the put/call ratio as any significance. Cheers!
What are you talking about - none of the exchange traded options expired today. And unless you know whether those puts were being bought or sold, you don't know what the general bias is - if big numbers of puts were being bought, they could be hedges against an after the first of the year meltdown - if they were being sold, they could be bullish plays with an expectation for higher prices.
Duh . . . Yes, it is true that there were no "exchange-traded" options that expired on December 31st. However, many investment banks and their equity-derivative desks have the ability to create and customize collars on individual equities as well as equity indexes such as the S&P 100 and 500. As a result, the surge in volume in puts that were traded in the last 2 days of the year are indicative of the types of strategies listed above being executed. There are also quarterly expirations as well, while June 30th sees a fairly large share of customized options, collars, and hedges going off. Ask anyone that works on an equity-derivatives desk. They will tell you that collars and other types of hedges are created and unwound all the time, with no relation to exchange traded expirations. ie.) Ever wonder why a market will SURGE past an important round figure in the S&P or Dow, or BREAKDOWN below a significant "psychological" level as well? Answer: Collars