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mortiz

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Reply with quote  #1 

Really pressed for time today, but have noticed over the past few days a very unusual event in the OEX options open interest numbers.  Typically, the put open interest is always larger than the OEX call open interest (OI), often the put OI is double the call OI.

 

Starting early last week, a significant jump in the OEX call OI commenced and Friday's call OI exceeded the OEX put OI for the first time since late December 2005, when the call OI exceeded the put OI for one day (1.02).

 

So what's the big deal?  Friday's OEX call-put OI ratio was 1.03, the highest ratio since March 11, 2003. Prior to the December 2005 one day ratio greater than 1.00, we have to go back to mid-August 2004 where there we two consecutive days of an OEX OI call-put ratio greater than 1.00.  If one thinks back to the price action of the aforementioned dates, those time frames accompanied important price bottoms.

 

I have studied the OI data for several index options series and have found the Q4 and OEX are the two indices whose OI data has some value in future price predictions.  This current OEX OI configuration has a good history of telegraphing higher prices ahead.  The below chart illustrates the 5 day MA for the OEX OI call-put ratio since the beginning of 2003.

 

 

There are several other sentiment related indicators that are in bullish configurations, particularly considering the price action over the past several weeks, but one that I feel has been very interesting is the asset flows of the four largest paired bull-bear funds traded at Rydex.  Below is the current fund price-adjusted Rydex bull-bear fund asset ratios of the four largest pairs.

 

This ratio indicator's 5 day EMA is at its lowest level since the inception of these fund pairs... talk about skepticism in this market by the Rydex traders... astounding IMHO.

 

 

Of course, sentiment can turn on a dime, or these indicators can become far more extreme, but to these old eyes, this behavior is simply amazing considering what prices have achieved over the past few weeks.

 

FWIW

 

Randy

 

PS to Geo (if you see this): just saw your $-adjusted Dow comments in another thread, and will try to find time this weekend to update a past study on the topic.

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fib_1618

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Reply with quote  #2 
Quote:
So what's the big deal? Friday's OEX call-put OI ratio was 1.03, the highest ratio since March 11, 2003.

Fascinating work Randy...right at the war lows where the bearish extreme at that time was as high as at any time in the last 70 years.

Considering the continued bullish underlying tone of the internals right now, one would then have to consider the idea that after such an extended period of phenomenal A/D statistics, the price averages are about to embark on a comparative run to unthinkable price levels.

In the fullness of time.

Fib


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geosing

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Reply with quote  #3 

Are you guys trying to make me nervous holding YM short as of Friday close?

 

The monster up candle on Friday usually results in at least the market being held aloft for two more days - now complicated by the impending FOMC announcement.

 

However I am net long, as I have one long DD (big Dow). Man, this one trades very thin - kind of scary, as it trades less than 90 contracts. I may get flat on Monday, as this position trading is too nerve wracking for me. I can never get the conviction I have in daytrading situations.

 

Randy - please post when you can. Especially if there are some practical applications.

 

Geo

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mortiz

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Reply with quote  #4 

Geo: not trying to make you nervous, you are very capable and this data does not apply to intraday movements .

 

The weekly OCC equity options volume and premium numbers continue to go against normal behavior during periods of rising prices.

 

First is an update of the weekly smallest retail equity options traders (1 to 10 contracts per transaction) Buy-To-Open (BTO) call-put ratio. Despite index prices climbing to multi-year and all-time highs, the small retail customers are not convinced this rally is going to last.  Their ratio continues to hover at or below the 20 week MA, with the MA starting to roll down... amazing action considering the upward trend of prices thus far in 2006.

 

 

The total retail customer (all transactions sizes) equity option BTO call-put ratio is behaving similarly, although the total retail customer universe is not quite as optimistic as noted by the two groups call-put ratio magnitudes.  As with the small trader's ratio, the total retail customer ratio has chopped around beneath its 20 week MA, and the MA has rolled over as well. 

 

 

The equity options market makers on the exchanges would have to be considered among the "most informed" group of equity options players.  The chart below measures the market maker's BTO closing call position volume as a percentage of total equity call volume on all six exchanges.

 

When the market makers' BTO call position closing percentage reaches the 40% to 44% levels of total call volume, it typically indicates the market makers feel prices are going higher.. circled are a few examples of low market maker call position closings in the past and the corresponding price structure at the time of the low indicator postings.

 

The current 4 week MA of this indicator is at its lowest level since August 2004, suggesting the market makers want to hang on to their equity calls.

 

 

Another example of the wall-of-worry in the market over the past many weeks by the public, and the tendency of the most-informed players perhaps a little more confident in their long call positions.

 

FWIW

 

Randy

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mortiz

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Reply with quote  #5 

Update on the OEX open interest status following Monday and Tuesday's OEX options trading:

 

- Apparently the unusually high call open interest relative to OEX put open interest late last week was not a flash in the pan.  Monday (5-8-06) OEX open interest call-put ratio was 1.01 and Tuesday's was 0.99.

 

- The current 5 day MA of the OEX open interest call-put ratio has now exceeded the August 2004 five day MA ratio.  Since this bull cycle was born in 2003, the current 5 day MA is only exceeded by a string of higher postings in the February- early March 2003 time frame. 

 

Either the collective OEX options traders are uncharacteristically wrong right now, or a price rally of some significance is about to get underway..... as Fib would say, in the fullness of time.

 

FWIW

 

Randy

 

PS: for those follow the TW chat room discussions or do your own work with OEX internals and price behavior, there are clues in that domain of the probable direction in OEX prices.

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