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.