By monitoring the CBOE equity put-call ratios the final three days of last week (about two call contracts traded for every put contract), one could conclude the bulls are jumping on this rally in droves (see below chart).
The blue curve is the CBOE equity 10MA put-call ratio, the black curve the all-exchanges' equity 10MA put-call ratio. Although the CBOE equity 10MA PC ratio is at 0.61, the ratio is in the midst of a waterfall decline. From the CBOE numbers perspective, normal behavior during a robust price rally, suggesting the options players are loading up on longs.
However, examining the Options Clearing Corp (OCC) call and put volume breakdowns from last week's action, the data is suggesting a Rodney Dangerfield type rally, i.e. "I get no respect....".
First is the weekly equity buy-to-open call-put ratios for the smallest options traders, those trading from 1 to 10 contracts per transaction. Note the buy-to-open call-put ratio for the smallest equity options traders actually decreased last week to its lowest level sing August 2004. All of this in the face of a 3% price increase in the SPX.
Recall buy-to-open transactions, especially for the smallest group of traders, typically reflects their bullish or bearish mood concerning their favorite stocks. The buy-to-open data not not include volume associated with closing positions, nor writing put and call contracts.
In addition, the smallest group of buy-to-open equity options traders were willing to bid up the price of puts, relative to calls, last week. This next chart is the average buy-to-open call-put premium ratio for the smallest equity options traders. Although the call-put premium ratio did not achieve levels seen at past important price lows, I found it fascinating the ratio actually dropped last week.
The lack of respect for last week's rally in the equity options market was not reserved for the smallest equity options traders. The next chart is the weekly total retail customer buy-to-open call-put ratio, regardless of contract transaction size. Despite being about 3% from breaking the recovery SPX price highs, the total retail customer buy-to-open call-put ratio last week remained at levels typically associated with intense price declines.
The next chart is the retail customers' percentage of call buy-to-open call volume relative to all options volume (put and call closing positions/writes, etc). Currently, there isn't a voracious appetite by the retail options players for buy-to-open equity call contracts. In fact, the percentage is the same as the August 2004 lows.
Although the Rydex asset flow indicators, especially for the leveraged index bull-bear funds, have become suspect the past few months, I believe this next chart reflects the lack of respect of the current rally by the Rydex "hot money" traders. This indicator measures the ratio of shares in the largest dynamic bull-bear fund pairs offered by Rydex (Nova/Ursa, OTC/Arktos, Titan/Tempest, Velocity/Venture).
There is no eagerness on the behalf of the Rydex traders to jump on this rally either. The bull-bear fund share ratio of the largest Rydex bull-bear fund pairs, is still at levels typically coinciding with price lows.
In conclusion, the standard equity put-call ratios, such as the CBOE's, suggested a growing acceptance of the current price rally, especially late last week. By examining the motivations behind the options volume last week, i.e. the equity buy-to-open volume ratios, it appears this rally is receiving little respect and belief from the options players (and Rydex traders).
The above data suggests a large percentage of last week's equity call volume was generated by the closing of call positions, writes and buy-to-open contracts, by the retail customers.
For the IT, this behavior favors the bullish camp from the "wall of worry" perspective.