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TW Patron++
Posts: 1,054
Reply with quote  #1 

Over the past month and a half, many major averages are up 2% or more, but when the Buy-To-Open (BTO) equity options call-put ratios are examined, one would assume the most indices had declined by two or more percent. 


The BTO equity options data is one of the purest measures of option traders' motivations since it does not include the volume of positions being closed, only the volume of opening positions in calls and puts.  The ISE options exchange publishes daily the retail customer BTO equity options call-put ratio, known as the ISEE index.  Those who follow the ISEE indicator are well aware of the lower than average ISEE numbers over the past several weeks, despite firm to rising prices.  The 200 day SMA for the ISEE index is just over 170, while its 20 day EMA is 144 and 5 day EMA 129... amazing considering the price action. 


The current ISEE 20 day EMA is over two standard deviations below its 100 day mean!


The Options Clearing Corporation (OCC) publishes weekly, the BTO equity options volume and premiums for all six options exchanges, and breaks down the BTO data into the activities of the retail customers, brokerage firms, and market makers.  In addition, the BTO data for the retail customer action is further refined by breaking it down into contract transaction sizes: 1 to 10 contracts per transaction (smallest retail traders), 11 to 50 per transaction, and over 50 contracts per transaction.


Here is an illustration of smallest trader's BTO call-put volume ratio activity over the past several years.  After spending the past seven weeks below its 20 week MA, twice flirting with its lower band, the small trader BTO call-put ratio finally rose to touch its 20 week MA neutral zone last week.




Next is the weekly small trader BTO call-put premium ratios over the past several years.  Both the weekly and 3-week MAs of the small trader call-put premium ratio has achieved the levels of August 2004 over the past couple of weeks, so this group of equity option traders have been furiously trying to pick that top!



Next is the weekly total retail customer (all transaction sizes) BTO equity options call-put ratios over the past several years.  A couple of weeks ago, this indicator touched its lower band and has lived in its lower range for several weeks as well.



Next is the "all retail customer" BTO $ weighted volume call-put ratio derived by multiplying the weekly call and put BTO volume by their corresponding premiums.  This indicator's 4 week MA has decisively broken its October 2005 lows indicating not only have the retail customers been skewing their BTO volume toward puts, but they have been bidding up premiums as well. 


The OCC does not provide data showing if the volume is in out of the money or in the money contracts, but the behavior of the premium related data over the years supports a contrary opinion tendency.



The next chart is an "all-exchange" weekly version of the ISEE index, using the same calculations as the ISE exchange uses with their index.  The 4 week MA OCC version of the ISEE index is at its lowest level since the May 2005 price lows.



Next is the market maker premium call put ratio of BTO closing positions (the OCC doesn't publish market maker opening position data).  When this indicator reaches its lower range, and remains there for a few weeks, then pops up out of that range, price typically move to the upside.  In many cases, an upside pop in this indicator as occurred last week, prices follow the indicator pop. 


But the May 2005 and October 2005 price lows were accompanied by an upside move in the market makers indicator, with price following to upside the following week.  We'll see if that behavior follows the script this week.



Veering away from options indicators, below is one of my favorite Rydex fund asset flow indicators, measuring the "share ratio", assets divided by fund price, of the four largest Rydex bull-bear fund pairs.  Several days ago, this indicator posted the second "lowest low" since the 2002-2003 price lows, only exceed by the October 2005 indicator low.



There are a few sentiment-type indicators that are actually flashing bearish warning signs, primarily the options volume-volatility "power tool".  But with the level of top picking seen in the equity options market by the retail customers, it would be very unusual for them to be right this time.  IMHO, I would expect the indicators discussed above to be at far more frothy levels before a significant, sustained price decline unfolds.


Sentiment, along with cycle considerations, and very strong liquidity flows into equities, suggest to me a surprise to the upside in prices is coming soon.






TW Patron++
Posts: 497
Reply with quote  #2 



Thank you for a first rate, high quality review of the options and rydex data. It dove-tails nicely with much other TA suggesting good upside potential right around the corner.




TW Member
Posts: 184
Reply with quote  #3 

I second that.
Also there has been a wild top picking spree going on while Nasdaq Composite has been breaking out to 5 year highs. Thats my personal observation.


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