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Posts: 1,054
Reply with quote  #1 
The Options Clearing Corporation (OCC) is responsible for clearing all options volume on all of the US options exchanges.  The OCC classifies all options transactions as opening and closing volume for Buy To Open (BTO) and Sell To Open (STO) puts and calls. In addition, the OCC separates the transactions into three categories:

1) Retail Customers (3 classes): 1 to 10 contracts per transaction; 11-50 contracts per transaction; over 50 contracts per transaction

2) Firms

3) Market Makers: the market makers' BTO and STO activities are not published (darn), only the closing volume and premiums for their BTO and STO transactions.

Note: the OCC includes ETF options volume (Qs, SPY, IWM, DIA, etc) in the equity option bucket, not the way to go IMHO, but that's the way it's done.

Last week, the smallest retail equity options traders, 1 to 10 contracts per transactions, were loading up on BTO calls at a rate not seen since week ending 5-12-2006, with a put-call ratio of 0.39. That is over 250 BTO calls for every 100 BTO puts, talk about buying the dip.  It is possible the call buying frenzy took place early in the week, but that is likely wishful thinking for the bulls.

In addition, the average premium these smallest traders paid for each BTO call was $414, the richest average premium for call contracts since early 2006.  In contrast, the average premium paid by the small traders for BTO puts was $275, a bit higher than normal, but not excessive.  Below is the smallest equity options trader BTO put-call volume ratio over the past several years. 

Next is the largest retail equity options players' BTO put-call ratio.  To be included in this group, you must trade over 50 contracts per transaction.  This group typically accounts for over 2/3 of the retail equity options volume in a given week.

Last week, the largest retail equity options traders had a large appetite for opening new put positions, with a BTO put-call ratio of 1.20, which until this year, was as extreme as their BTO PC ratio gets.... needless to say, the big retail traders are betting on lower prices. 

So we have quite a dichotomy in place with the retail equity options players positioning, the smallest retail traders are loading up on BTO calls at a rate not often seen, and the largest retail equity options traders are awash in BTO puts.

Which of these groups would you bet your money on?

Before running out Monday morning buying puts or calls with both hands, let's see what the equity options market makers are up to.

As stated earlier, the OCC does not report the BTO activities of the market makers, by design.  They only report the closing of market maker BTO and STO put/call positions.  However, there does seem to be a pattern of the market makers' behavior which can be useful.

The next chart is the market maker call-put ratio of their closing of BTO positions.  When the blue curve rises, it reflects the market makers are closing their BTO call positions at an increasingly higher rate than their BTO put positions.  The converse is the case when the blue curve is declining.

Last week the market maker BTO closing call-put ratio rolled over meaning they have been on-balance, increasing the closing of their BTO put positions relative to their BTO call positions.  When the rollover of this curve begins with the ratio comfortably above 1.50, then falls below 1.50 over time, it serves as a strong warning of pending trouble for the bulls.

Since the March 2007 bottom, this indicator has not exceeded the usual 1.50 demarcation line and is now rolling over beneath the 1.50 threshold. The current amount of time this indicator has remained below 1.50 has only been exceeded by the June 2006 through December 2006 time frame. 


So we have conflicting signals with these tools:

1) Smallest equity options players are very bullish, their market direction predicting track record is not great, but they have been right once in a while.

2) Largest retail equity options players are getting very bearish... normally one would conclude this group of players as being more savvy traders than the smallest retail group, since you don't grow your account to the level of trading over 50 contracts per transaction by being wrong all the time.

3) Unless past history has changed, the market makers do not appear to be betting on a large decline currently, which is consistent with what the index commercials COT data is suggesting.

So could the smallest retail options traders be positioned on the right side of the market?  Doesn't seem like their normal behavior, but there are always exceptions. Based upon the futures commercials' positions and the options market makers', maybe the little guy will be right this time?

Since the market makers are usually the options winners, and the largest positions are currently held by the largest retail options traders, maybe the more affluent retail options trader will be the bag holder this time?

In the fullness of time....



Posts: 4,849
Reply with quote  #2 
Two questions:

1) When is this data available, and what period is covered?

2) Does this data break down the amount of contracts by month or in total?


1) Smallest equity options players are very bullish, their market direction predicting track record is not great, but they have been right once in a while.

Knowing the track record of these traders, one would think that they may be buying calls on the June contract to exploit a deeply "oversold" condition, no less, been conditioned to do so after being burned so many times in the past. We also have to consider that many small players are now using software programs to move them in and out without having to get emotional about it.

2) Largest retail equity options players are getting very bearish... normally one would conclude this group of players as being more savvy traders than the smallest retail group, since you don't grow your account to the level of trading over 50 contracts per transaction by being wrong all the time.

With the "smalls" in mind, since last weeks sell off was based on interest rates moving higher, could it be that these "savvy traders" are assuming that this intermediate term bad news for equities in general and begs for continued re-evaluation of current prices, no less, the need for internal divergence just to make a more solid foundation in which to once again move higher??

3) Unless past history has changed, the market makers do not appear to be betting on a large decline currently, which is consistent with what the index commercials COT data is suggesting.

And, of course, further corrective activity can unwind either by price, time, or both. Based on current market conditions, my intuition tells me that we'll probably wind up in some sort of consolidation pattern between the two segments of traders. Something like this would also compliment the call/put ratio which seemed to fail at the 1.50 level...not too hot, but certainly cold enough to keep the SPX from moving to far out of it's current price area of 1475/1525.

Bigger picture wise, this is something we talked about briefly in the chat room about a month ago as the SPX came closer to challenging its all time highs:

2007-05-16 20:27:35 [Message] denleo -> Main Room: I think all time highs (above 1552 on SPX cash) is a self fulfilling prophesy.
2007-05-16 20:28:07 [Message] fib_1618 -> Main Room: let's keep our fingers crossed in that we might get another shake out to the 1490 area and then we'll probably be able to move above this target to the next one...SPX 1600
2007-05-16 20:28:18 [Message] fib_1618 -> Main Room: it's just a matter of time Dennis
2007-05-16 20:28:25 [Message] denleo -> Main Room: Yep
2007-05-16 20:28:27 [Message] fib_1618 -> Main Room: but it is resistance
2007-05-16 20:28:32 [Message] fib_1618 -> Main Room: and the market will play it up
2007-05-16 20:28:41 [Message] fib_1618 -> Main Room: just like with the Dow did at 11,800
2007-05-16 20:28:52 [Message] fib_1618 -> Main Room: and moved to all time highs earlier this year
2007-05-16 20:29:02 [Message] fib_1618 -> Main Room: 10 points to go
2007-05-16 20:29:07 [Message] fib_1618 -> Main Room: 5 points to go...
2007-05-16 20:29:14 [Message] fib_1618 -> Main Room: oh no...failure
2007-05-16 20:29:18 [Message] fib_1618 -> Main Room: down we go 20 points
2007-05-16 20:29:24 [Message] fib_1618 -> Main Room: rally back up again
2007-05-16 20:29:28 [Message] fib_1618 -> Main Room: test...retest
2007-05-16 20:29:32 [Message] fib_1618 -> Main Room: move above it
2007-05-16 20:29:36 [Message] fib_1618 -> Main Room: move back below it
2007-05-16 20:29:45 [Message] fib_1618 -> Main Room: you know what I'm talking about
2007-05-16 20:30:01 [Message] fib_1618 -> Main Room: it would be unusual that we just blast up and through it
2007-05-16 20:30:06 [Message] fib_1618 -> Main Room: especially since the NAAD is currently in a bearish configuration
2007-05-16 20:30:28 [Message] fib_1618 -> Main Room: the SPX is going to need the NAAD to move higher
2007-05-16 20:30:50 [Message] fib_1618 -> Main Room: I still like by June OPEX
2007-05-16 20:31:02 [Message] fib_1618 -> Main Room: maybe sooner
2007-05-16 20:31:13 [Message] fib_1618 -> Main Room: the market is so strong right now that I wouldn't discount anything

And so it goes.


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Reply with quote  #3 
It appears a blue circle is missing.


TW Patron++
Posts: 1,054
Reply with quote  #4 

Due to business travel this PM, I'm short of time as usual, but will try to address your comments/questions.

Question: When is this data available, and what period is covered?

Response: The OCC publishes this data every weekend, normally on Saturday.  It covers the week just ended, in this current case, the week ending 6-8-07.

Question: Does this data break down the amount of contracts by month or in total?

Response: The OCC data covers only the total buy-to-open, sell-to-open, and the closing volume/premiums of those contracts for each group listed earlier.  Thus we do not know if the contracts are in the money, out of the money, or what expiration months are involved.

Your commentary on the topic, consolidation, is the most likely outcome IMHO, based upon the other work we do with regards to price and money flow tools. Some money flow indicators, the Price-Volume-Change ($PCV) McSums have reached historically high levels and rolled over.  This action is typically associated with a period of consolidation, but devastating price declines have not been part of those consolidations.

Some scary corrections, yes, but the digestive period is followed by higher price highs in the coming months, and I believe the same outcome is in store going forward.  The chat excerpts posted from May is likely going to be the script.

Johnny: your observations about the small trader PC ratio rising prior to healthy correction is what I've noticed over the years with this data, as well as other options data. As Bill comments in this thread, the smallest traders are likely not doing too much hedging with their BTO action, since the average amount of money involved in their transactions is typically $250 to $3000.  There is a sell-to-open transaction category which likely covers the small trader hedging and premium play strategies.

Bill: I guess there are a couple of ways of looking at the current market maker/commercials, large speculator, and small trader data for both the options and the futures action.  One is the small traders are usually the bag holders, and they are easier to shake out than the more liquid large speculators... thus an easier pay day for the house playing the other side of the contracts.

However, normally the dollars on the table are more significant for the larger options traders, but last week you may noticed the large retail call premiums totaled $875M versus the small traders' call premiums came to $821M... the small traders' calls could be easy pickings for da boyz.  For the put premiums, the small traders' opening positions totaled $215M, whilst the large retail put premiums on opening positions last week totaled about $800M.

So which of those buckets would be easiest to raid next week?  That $821M the small traders opened in long calls last week could be the easiest to shake loose.

In an attempt to take a look at past large discrepancies between large retail customer BTO put-call ratios and small retail customer BTO put-call ratios, the green curve toward the bottom of the below chart illustrates the large-small customer put-call ratio, smoothed with a four week MA.

Up until the past several months, the delta between the large and small retail PC ratio has rarely exceeded 0.50, but has become the norm of late.  Circled in red are the peaks of this indicator, and circled in blue on the SPX price curve are the corresponding price configuration when the PC deltas peaked.

In most cases, there was further short term pain for the bulls, but except for the December 2000 event, an important price bottom was not too far away.

The current weekly delta between the large retail and small retail PC ratio is 0.81, the largest delta in 7.5 years of this data.  I have added black arrows near the red price curve to illustrate where several of the largest PC delta have occurred in the past.  Note a few of the largest PC deltas have occurred right before corrections unfolded, and this was the case leading up to the correction last week.

Following the actual price correction, larger PC deltas continued to remain in place, with the large retail players continuing to become more bearish along with the small players.  The one data point that is currently out of place during prior corrections, is the market maker BTO position closing call-put ratio not reaching the 1.50 level, which is unprecedented.

IMHO, this data along with money flow tools, is suggesting more work is needed to provide a foundation for the higher price highs that will be coming down the road.  Whatever the outcome over the next several weeks, the more bearish scenario would break the string of market maker behavior preceding a price correction of more than 2 or 3%.



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Posts: 50
Reply with quote  #5 
Instead of looking at the trees, let's look at the forest.
I drew some lines.......
What I see, is that we have a huge divergence between SPX and the blue line. The trend was falling from 2000 to 2002. We the recovered with a spike up.
BUT then again the trend started falling and has done it since.

Let's look at some other divergencies - green lines.
Everytime we have had a divergence there has been a big drop (taken into context of the magnitude of the divergence).

We are now viewin divergencies in two perspectives;
1. A - the green lines,to the right
2. And, God help us, B, the pink lines.

What I see is
1. much lower prices and perhaps
2. Much, much lower prices...

The perspective should be obvious from the charts that are attached (I still have problems posting more than one chart... they end up all over the place and are much too big.
Isn't there a tutorial somewhere?)


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