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mortiz

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Reply with quote  #1 

xDCox brought up some good information in an earlier thread concerning the index options PC ratios versus the equity options ratios, as well as some longer term, troublesome divergences (for the bullish case) cropping up in many internals indicators.  By the way XD, thanks much for continuing to post your great work on TW.

 

To minimize my added clutter in the thread containing XD's work on the topic, the following ramblings might provide some additional evidence with regard to sentiment in the options market and a couple others.

 

The first chart is the weekly OCC data measuring the equity buy-to-open (BTO) call premium-put premium ratio for the smallest equity options traders, those conducting transactions of one to ten contracts.  The indicator divides the total BTO call premiums by the total BTO put premiums paid by the small equity options players for the privilege of buying equity options contracts.

 

Note since the April lows, there have been three large spikes in this indicator, the most recent occurring last week.  This willingness of the small traders to pay hefty premiums for equity calls relative to puts, has yet to derail rising index prices, but historically, ratios at these levels have not bode well for the longer term bullish case.  Of course, as with any sentiment indicators, this trend could continue for awhile with nominal impact on index prices.

 

The small equity options traders were not alone last week in their appetite for BTO call contracts at dearly priced premiums relative to puts.  Next chart is the total retail customer (all transaction sizes) equity BTO call premium-put premium ratio.  The current ratio is the second highest since this data became available in early 2000.

 

The ratio was 1.64 last week, exceeded only by by the week of 3-10-2000 at 1.69.

 

 

Not all options related sentiment indicators are exhibiting the extremes as the previous premium related tools.  Next is an illustration of the CBOE equity P-C ratio versus the equity P-C ratio of options volume in the other five exchanges.  The CBOE comprises about 27% of the average equity options volume, so is often a good idea to see what the other 73% of the options volume is doing. This data comes from the OCC, which includes Q4 options volume, thus to "purify" the data to strictly equity options, the Q4 volume is removed.

 

Both the CBOE and "other exchange" PC ratios formed their troughs in mid-July which was a good warning of a coming correction, but note the "other" exchange PC ratio did not come close to levels usually seen at important tops.  This could could explain the moderate price deterioration in the ensuing correction.  Currently, both of these guages would have to be assigned neutral ratings.

 

 

Next is the ISE exchange's ISEE sentiment index, measuring the daily BTO equity call-put ratio for the ISE's retail customers. Measuring this data for the intermediate term, it too would have to be classified as neutral.

 

 

Next is an IBD proprietary indicator they call the "put-call premium ratio".  I have no idea how the data is derived, but I have followed it for a few years, and it works pretty well for spotting bottoms after turning up from a decline.  Note how it bounced perfectly from the support line going back to May 2004.  This indicator is not useful for nailing major price tops.  Currently, this indicator is neutral.

 

 

Next is the SPY-SPX liquidity premium (LP) indicator, whose concept was originated by Jason Goepfert of SentimenTrader.com.  The indicator compares the SPX component volume against the SPY ETF volume.  When the indicator reaches the lower dashed green line, we usually see a price top follow in short order.  When the blue curve reaches the upper dashed green line zone and rolls over, price bottoms are being formed.

 

A buy signal was given by the SPX-SPY LP in early September, but has accelerated quickly toward the neutral zone in the past few days, indicating the defensive posture exhibited by traders only a week or so ago has quickly turned to the aggressive side.

 

Tom McClellan has derived a variant of Jason's LP, and the McClellan SPX-SPY version is very close to the sell signal zone.

 

 

Next is a sentiment indicator that simply shows the ratio of the NASDAQ daily volume and the NYSE daily volume.  When this indicator approaches the "100%" zone, meaning the NYSE volume is equaling or exceeding the NASDAQ volume, price bottoms are typically being formed.  In the past week, this indicator reached is lowest value since March 2003.  The indicator also does a reasonable job in identifying price tops, but is often early, and the levels pinpointing tops are erratic.

 

 

In summary, there are a couple of very troubling signs in the option premiums, which are dovetailing with XD's index-equity options post.  Many other sentiment indicators are exhibiting a more neutral stance currently, which could be quickly resolved one way or the other with quad-witching next week.

 

In the aggregate, there is still sufficient room in most sentiment indicators allowing for further price appreciation, but the ratios in the OEX options market, open interest and volume ratios, are not to be ignored and should be closely monitored.

 

FWIW


Randy

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xDCox

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Reply with quote  #2 

Thanks for the great work, very informative.

Your message reminded me something that I have been following for a while but I am not sure whether it is directly related to the option premiums.

Question is "Is VIX inversely corraleted to equity Call option premiums (and directly corraleted to equity Put option premiums)?"

That is, if Call premiums go higher, Vix go lower and vise versa?

 

The reason I am asking this is you mentioned very high call premiums paid by retail investors and the VIX as seen on the following chart looks like repeating a situation occured in 93 in which SPX sharply pulled back after an initial breakout.

 

We have the similar situation now, VIX penetrated 10.50 level in July, SPX brokeout its declining top line then tested and rebounding now along with declining VIX. 

 

In the case of 93 it was the following month (January 94) that VIX tested the lows and SPX rallied shaply and reversed as sharp as the rally.

 

If today's case is a repeat of December 93 it should be this month or early October that SPX should sharply rally then reverse. High call premiums makes sense if SPX would make a terminal move soon.

 

This also fits with the high OEX P/C situation. If history repeats, OEX P/C should top out about 2 weeks before SPX top.

 

 

 

 


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mss

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Reply with quote  #3 
xDCOX,
You might take a quick look at this posting here as it might shed some more light on your thoughts.

TW BOARD http://forums.technicalwatch.com/tool/post/fib_1618/vpost?id=541062

Scott
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mortiz

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Reply with quote  #4 

XD,

 

There have indeed been several similarities between the current market climate and that of 1994, particularly with respect to the volatility cycles, i.e. volatility was low in the mid-90s as it is now.  A significant difference between the 94 market and the current one (at least until the past month or so) is the superior liquidity present today as measured by the cumulative AD indicators. 

 

You have brought up an interesting question concerning the correlation of equity premiums to index premiums, the latter of course being the basis of VIX, VXO, QQV, and VXN calculations.  I have also collected the weekly OCC data for index options premiums, but as you mentioned in another thread, the OCC does not parse out the volume nor premiums paid for the various index options.

 

The question you have posed concerning correlations between equity and index option premiums has now gone on my list for future projects, which will be addressed when I complete a project I am currently working on. You have mined a very interesting potential analogy with 1994, something that needs to be carefully watched going forward.

 

As far as the extremes in equity call versus put premiums, unfortunately, the OCC does not provide any indications if these excessive premiums are the result of extraordinary volume with in-the-money calls with higher premiums, versus heavy volume in the lower premium out-of-the-money puts. 

 

Regardless of the strikes, in, at, or out of the money, the premium ratios are currently lopsided in favor of call premiums.  The history of the OCC data is somewhat limited, but it appears index prices have had difficulties appreciating in price when the premium ratios are hanging out at their current levels.

 

Thanks for the thought provoking comments and analogy presentation, something I will be investigating when I wrap up my current obligations.

 

Best,

 

Randy

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xDCox

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Reply with quote  #5 

Quote:
Originally Posted by mss
xDCOX,
You might take a quick look at this posting here as it might shed some more light on your thoughts.

TW BOARD http://forums.technicalwatch.com/tool/post/fib_1618/vpost?id=541062

Scott

 

Yupp I have seen it a while ago,

the first chart which has 8 week ema of the inverted VXO looks like nicely nailed both 1998 and 2002 bottoms


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xDCox

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Reply with quote  #6 
Quote:
Originally Posted by mortiz

XD,

 

There have indeed been several similarities between the current market climate and that of 1994, particularly with respect to the volatility cycles, i.e. volatility was low in the mid-90s as it is now.  A significant difference between the 94 market and the current one (at least until the past month or so) is the superior liquidity present today as measured by the cumulative AD indicators. 

 

You have brought up an interesting question concerning the correlation of equity premiums to index premiums, the latter of course being the basis of VIX, VXO, QQV, and VXN calculations.  I have also collected the weekly OCC data for index options premiums, but as you mentioned in another thread, the OCC does not parse out the volume nor premiums paid for the various index options.

 

The question you have posed concerning correlations between equity and index option premiums has now gone on my list for future projects, which will be addressed when I complete a project I am currently working on. You have mined a very interesting potential analogy with 1994, something that needs to be carefully watched going forward.

 

As far as the extremes in equity call versus put premiums, unfortunately, the OCC does not provide any indications if these excessive premiums are the result of extraordinary volume with in-the-money calls with higher premiums, versus heavy volume in the lower premium out-of-the-money puts. 

 

Regardless of the strikes, in, at, or out of the money, the premium ratios are currently lopsided in favor of call premiums.  The history of the OCC data is somewhat limited, but it appears index prices have had difficulties appreciating in price when the premium ratios are hanging out at their current levels.

 

Thanks for the thought provoking comments and analogy presentation, something I will be investigating when I wrap up my current obligations.

 

Best,

 

Randy

 

Thanks Randy, that is something I really like to learn going forward. If equity premiums are related to index premiums and VIX, that makes it easier to spot serious tops. 

Also I agree that today's liquidity and program trading probably kills a lot of volatility.

 

 


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