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mortiz

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Surprising results from the OCC concerning retail customer buy-to-open (BTO) equity options premium data last week, first the widely followed ISEE index status.

 

Most are familiar with the ISE Options Exchange ISEE index which measures retail customer equity BTO call volume versus BTO put volume.  This indicator is for ISE exchange volume only, which currently comprises about 33% of the total equity options volume traded on all six options exchanges.  Interestingly, the CBOE accounts for 26% of equity options volume, and is no longer the biggest in equity options volume.

 

The ISEE index is currently in the lower neutral zone, but is going in the right direction in neutralizing the recent complacency within the options world.

 

 

Next is the OCC weekly BTO equity options premium call-put ratio for the smallest equity options traders, those who purchase opening long positions on ten or less contracts per transaction.  Although the small trader BTO call-put premium index could go lower before cleansing is completed, the indicator is at the level it achieved in October 2005.  The OCC doesn't report if contract volume is in-the-money, at-the-money, or out-of-the-money, so we don't know if the low call-put premium ratio is a result of in-the-money put purchases (or out-of-the-money call purchases).

 

However, this indicator has a better correlation with price direction than volume only BTO call-put volume, thus the issue of what strikes are being bought to open doesn't seem to affect its usefulness.  This indicator is currently bullish from a contrary sentiment perspective.

 

 

Next is the OCC weekly small equity options trader BTO call-put ratio for volume only.  Although below its 20 week MA, good purging of bearish small traders usually occurs when the ratio is at, or close to its lower band.  This indicator is currently rated at mildly bullish.

 

 

Next is the OCC weekly BTO equity options premium call-put ratio for all retail equity options traders, regardless of transaction size. This equity options call-put premium ratio is also at same level of the October 2005 price bottom, but of course, can continue lower before sufficient bearishness is in place for a good price bottom.  Note the rising range of this indicator over the past 18 months.  The volume only total retail customer BTO call-put ratio (illustrated later) does not exhibit the rising range, thus there may be a bias over the past 18 months toward the composite retail customers favoring at, or in the money calls, while more interest is focused upon out-of-the money puts...  only guessing.

 

 

The total retail equity options customer (all transaction sizes) BTO call-put ratio, as measured in volume only.  Last week's ratio fell right on its 20 week MA, and is rated as neutral.  May need some more downside price action to drive this volume only BTO call-put tool down to the buy zone.

 

 

Some mixed signals between the volume-only and premium-only BTO equity options call-put ratios for the retail customers.  The market makers, who are on-balance the winners in the options game, are suggesting a price bottom is nearing, but is not here yet.

 

The OCC does not provide data for market maker BTO volume, only the market maker closing of those positions (darn!).  Since the market makers, in addition to trading their own accounts, must play the "other side" of an option transaction when retail customers or brokerage firms do not step up to play the "other side" of the transaction.

 

The below indicator measures the market maker call-put ratio (4 week MA) of BTO contract closing transactions, and does a fair job of identifying market turning points when the indicator reaches extremes, particularly at price bottoms.  Although this measure of market maker action is plunging downward at a rapid rate, it still has more work before reaching the range where price bottoms are formed. 

 

 

Although clues are emerging complacency is being replaced by concern in the options markets, these indicators are suggesting we are close, but not yet at a solid price bottom.  It is encouraging for the bullish case the premium ratios are at levels of the October 2005 bottom, but may need to go lower before the current consolidation/correction phase is completed.

 

Unrelated to sentiment, there are indications, particularly in the larger cap indices, the brunt of the damage in the internals (especially the volume related tools) is behind us. Divergences in the internals versus price are already surfacing in the large cap indices, but the smaller and mid cap internals indicators have yet to exhibit such divergences.  Signs of compression are also evident in many of the MCOs, so we will likely see a good move in one direction or the other fairly soon.

 

FWIW

 

Randy

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