Watching options trade can help you work out market sentiment
OK, the last thing I feel like doing here is trying to pick THE bottom. I’m an options trader, and lately I tend to trade with long gamma, which means I pay daily time decay, and in return, I get shorter (or less long) as stocks go lower, and generally buy somewhat into weakness, whether I’m convinced it’s correct or not. I just calibrate my aggressiveness to the degree I’m bullish or bearish.
Well, I’m a shade bullish here, so naturally there’s a tendency to see some half-full situations, when maybe it’s a stretch. I’ve mentioned that individual stock volatilities are frequently at 52-week highs ahead of earnings, and I’ve mentioned that the basic 10-Day put/call ratio recently hit a peak and turned lower. But put/call can be a little misleading sometimes. Among other reasons, a call “print” may really be a synthetic put in disguise. By that I mean many call transactions are tied in directly to stock transactions, wherein they trade as a combo. One side is doing a covered write all at once, while the other side is buying a synthetic put. So ergo it’s effectively a put that has traded, the only problem is that it prints as calls (and stock) and since it prints on two separate exchanges, there’s no real way to account for it in standard put/call ratios.
But just the fact that options trade in general says something about Fear and Complacency. Namely, the more options trade in general, the more Fear is evident, no matter whether it’s actually puts or calls. It’s not perfect, but it’s a reasonable measure of interest in the options market.
Well, the last few weeks have seen a nice spike in total option volume on the ISE. Since late April, the average day has seen about 1,750,000 contracts change hands, but the last day below 2,000,000 contracts was on October 10th. It reached a crescendo last week with 3 days crossing the 3 million level, coinciding with expiration (the high-water mark for the ISE).
Another possibility of course is that the spike in option volume represents increased speculation. But anecdotally, that doesn’t wash right now.
Adam Warner
Adam Warner is a proprietary trader for Addormar Co., Inc., specializing in option and derivative strategies. Prior to Addormar, he was an Equity Options Market Maker on the floor of the American Stock Exchange from 1988-2001.