Last week's Options Clearing Corp's (OCC) Brokerage Firm Buy-to-Open (BTO) equity call volume reached an all-time high, over 1.7 million contracts. The OCC has only published this data since early 2000, thus it's unknown if a greater number of BTO call volume positions by the brokerage firms took place prior to 2000.
It could be assumed the brokerage firms are an important component of "da boyz" so often accused (with a modicum of merit) of manipulating stock prices. I have tracked this data since its inception, but typical call-put ratios involving the brokerage firms' equity options activity are typically random. This is likely due to sophisticated strategies involving futures, options, and the underlying stocks.
It appeared the bulk of last week's brokerage firm equity BTO call volume took place Friday. The OCC treats the Q4 options volume as an equity, but the Q4 volume was not excessive Friday, thus one could deduce the "firms" were loading up on equity calls. The firm equity BTO put volume was also heavy at nearly one million contracts, but last week's firm BTO put volume is only the 13th highest in the past 5.5 years.
So the question: is the brokerage firm record equity BTO call volume bullish (they are betting on a big rally) or bearish (the BTO calls are hedges for shorts in stocks or futures contracts)?
After spending a considerable amount of time looking at the data from many angles, the conclusion is historical probability gives a slight edge to the bullish case. Several comparisons were attempted to derive a solid conclusion of the meaning of the extremely heavy equity brokerage firm BTO call volume, but very few provided decent clues. What brokerage firm BTO call volume extremes do imply, is we will see a tradeable price move very soon.
The first chart compares the brokerage firm BTO call volume as a percentage of the total retail customer (all transaction sizes) equity BTO call volume. Last week, the brokerage firm (BF) BTO call volume was 41% of the total retail BTO call volume, only the fifth time in 5.5 years the percentage of BF BTO call volume has reached at least 40% of the total retail BTO call volume.
Two of the +40% BF BTO call volume events occurred near short term price tops (circled in green), and two events transpired at important price bottoms. Thus, this comparison tells us a good move is about to occur, but in what direction?
The next chart compares the BF BTO call volume as a percentage of the smallest retail customer (1 to 10 contracts per transaction) BTO call volume. The measure of extreme in this comparison is the BF BTO call volume being 200% of the small retail customer BTO call volume. Several of the +200% events occurred just prior to upside price accelerations, but again, the brokerage firms covered their tracks four times, when prices soon collapsed to varying degrees. This comparison gives a historical edge to the upside scenario, but the chart suggests the upside outcome is not a sure bet.
The next step was to study the configurations of BTO call-put ratios of two retail customer classes, the total retail customer numbers and the sub-class 1 to 10 contract per transaction small traders, at the times when BF BTO call volume extremes occurred at or near price tops.
The BTO call-put ratio patterns and magnitudes of both retail customer classes were similar when BF BTO call volume extremes occurred at price tops, so only the small trader (1 to 10 contracts) call-put ratio chart is posted.
The small trader call-put ratio (not put-call) was in a downtrend during all four events when BF-small trader BTO call volume extremes occurred at price tops in the past (maybe the small traders shouldn't always be faded). As the below chart illustrates, the small trader BTO call-put ratio is in an uptrend (currently at 2.22) exhibiting a slightly different behavior than the four prior BF- small trader BTO call volume percentage extremes that occurred at price tops.
I am sure bulls and bears alike can come up with plausible reasons why the market will break one way or the other, as there are many cross currents in effect. From a historical perspective of extreme BF BTO call volume, the probability is quite high we will see a significant move of several price percentage points in the very near future.
Hopefully we are nimble enough to be on the right side of the impending price move.