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mortiz

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Reply with quote  #1 
There are several tools for measuring panic in the equities markets, and one of my favorites is the detrended options volume-volatility indicator I call the "power tool". It is based upon the power definition from physics and electrical engineering, where power = voltage*current.  Deriving an power analogy to market data, volatility = voltage, options volume = current.

The daily options volume for a given contract is divided by the contract's 30 day MA volume yielding a ratio.  A similar ratio is derived from the contract's associated volatility index, the two ratios are multiplied, and a 20% trend (9 day exponential moving average) is applied for smoothing purposes.

The OEX-VXO options volume-volatility series is an interesting variant in that the market makers are the dominant players, with retail traders being the only significant other group who trade OEX options (brokerage firms curiously do not participate in OEX trading with any significance).

Below is the current state of the OEX-VXO power indicator going back to 1996 to provide a longer term look at its history. The current level of the OEX-VXO power indicator has not rolled over (it will Monday most likely), but its current posting has only been exceeded by the September 20, 2001 level following the terrorist attacks upon the US.... interestingly, basically seven years ago to the day of this indicator's most recent extreme.



The SPX-VIX power series is exhibiting similar extremes, although noticeably less the September 2001 (as well as recent) extremes.  The SPY options have become an attractive alternative to the SPX options over the past year in particular, thus likely affecting SPX volume extremes.  The market makers have also become the dominant players with SPY options trading (as well as in DIA contracts)



The suspension of short selling in financial stocks as of Friday, 9-19-2008, not surprisingly, had a large impact upon the NYSE short sell volume as a percentage of total NYSE sell volume (raw data available daily on NYSE web site).  Over the past several months, the 50 day MA of short sale volume as a percentage of total NYSE sell volume has averaged 40% to just over 41%.  Friday's percentage of short sell volume was 26.3%, its lowest level in over two years.

Over the seven trading days prior to 9-19-2008, we have noticed the short sell volume percentage uncharacteristically falling despite the price carnage in the markets.  Since we can assume the "big volume" with respect to short sales is generated by highly capitalized players, the "big boys" were likely aware a climax in the decline was approaching, and they throttled back on opening new short positions.



To further illustrate the dramatic reduction in NYSE short sell volume as a percentage of total sell volume in recent days, is the number of standard deviations from the 50 day mean, now at its lowest level in the 4.5 years of this data series. The following chart smooths the daily standard deviation from the mean data, so doesn't clearly reflect Friday's five-plus standard deviations below the 50 day mean.



The equity option put-call ratio has not achieved the extremes reached in March and July of 2008, but often lower price lows are accompanied by lower put-call ratio extremes as the market approaches its final lows.

This equity put-call ratio includes the volume from all options exchanges, not just the CBOE which only accounts for about 30% of total equity options volume. This data is from the OCC, which unfortunately includes ETF volume in its equity volume.  To filter out the impact of the three highest volume ETFs (QQQQ, SPY,and IWM), their volume is not included in the put-call ratio in the following chart.  On a typical day, those three ETF volumes are heavily skewed toward puts.



It will be interesting to see how the market behaves next week after the big celebration is over for dumping the irresponsibilities of many banks, institutions, politicians, etc, on the taxpayers. Personally, I have a lot more study to conduct concerning the market action over the past few days, but at this point, I'm not convinced the market is going straight to new highs without more trouble for the bulls.

FWIW

Randy
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mortiz

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Reply with quote  #2 
One addition to this thread following the release of last week's OCC weekly options data over the weekend.

The OCC provides buy-to-open (BTO) and sell-to-open (STO) volume every weekend for retail traders and brokerage firm put and call activities. The OCC does not provide BTO or STO volume/premiums for the market makers, which is unfortunate and obviously the market makers want their BTO/STO tracks kept hidden.

However, by examining the retail/firm BTO/STO volume for both puts and calls, one can determine the level of BTO or STO volume the market makers generated to balance out the activities of the retail and firm activities.  The retail/firm BTO volume is almost always greater than their STO volume, so each week, one can determine how many put and call contracts the market makers had to write to balance the retail/firm long put or call trades.

Last week, the retail/firm equity BTO put volume exceeded their STO put volume by nearly 7 million contracts, the highest level in the nearly nine years of this data, and the market makers had to play the other side (the short side) of these BTO put contracts. To conduct a historical comparison of market maker levels of writing the put contracts to balance orders, we take a percentage of put contracts written by the market makers with respect to the total BTO put volume generated by the retail and firm BTO put volume.

The following chart's blue curve is bit messy since it is weekly data (not smoothed), but illustrates the level of market maker writing of retail/firm opening of long put positions was the highest since October 2002, and the fourth highest level in the nine year history of the data series.



Note in the 2000 time frame, this indicator was below its red dashed line zero level indicating the retail and firm equity put players were so confident the market was going up forever, they were selling puts to the degree that the market makers had to balance the trading by playing the BTO side of the put contract transactions.

With the unprecedented events of last week, at least in the past 75 years, it will be interesting to watch/trade what unfolds, but at least over the past nine years, the current level of market maker writing of equity puts to satisfy the appetite for long put positions by the retail/firm traders is at levels normally associated with tradeable price bottoms.

FWIW

Randy
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