Yesterday’s option action on the 1/100 Dow Jones Industrial Average index (DJX) took a decided bearish tone, which could be understandable thanks to the negative tilt of the day’s trading action. In total, 4,729 puts exchanged hands while 3,327 calls were traded. This action results in a put/call ratio of 1.42. In contrast, last Friday’s action saw 6,121 calls cross the tape compared to 22,464 puts. This subsequent put/call ratio was 3.67.
Does this mean that Friday’s option action was far more bearish than Monday’s? Not necessarily; both saw their fair share of puts. It looks like some of the bearish options yesterday were traded in order to leverage profit should the Dow continue its slide. For instance, let’s take a look at the February 92 put, which saw the heaviest trading of the day with 2,025 contracts trading. Does this mean that option players think that the Dow is destined to plummet through the 9,200 level before February expiration? Perhaps, but it is far more likely that these options were purchased because they were cheap (with an end-of-day ask price of 19 cents) and provided leverage. They have a small delta now, but should there be a substantial drop in DJX in the very near future, gamma will kick in and cause those deltas to grow rapidly leading to highly leveraged profits.
With the volume growth in option trading far outpacing stock trading growth over the past few years, there are lots of eyes on options activity.
Dan Passarelli is the author of the book Trading Option Greeks and founder and CEO of Market Taker Mentoring LLC. Passarelli began his trading career trading on the floors of the Chicago Board Options Exchange and the Chicago Board of Trade making markets in options. He regularly shares trading insights and educational tips in his options blog (markettaker.com/options_blog/). Dan can be reached through his website MarketTaker.com and can also be followed on Twitter at twitter.com/Dan_Passarelli.
Backtested ETF Trading Strategies! In just 5 minutes a day get handpicked ETF trading setups that are high probability, with Larry Connors’ Daily Battle Plan. Click here now for your free 7 day trial.