Last week's quad-witching activities motivated the usual shenanigans, evidenced by very large SPY call transactions by the market makers among other events in the options and futures pits.
I was also somewhat surprised by the retail customer equity options numbers from last week released by the OCC over the weekend. First, the smallest equity options traders (1 to 10 contracts per transaction) continue to be skeptical of the price run up over the past several weeks as reflected by their Buy-To-Open (BTO) put and call purchases last week.
Although off its high of 0.76 a few weeks ago, last week's small equity options trader put-call (PC) ratio came in at 0.62, which is still about 1.5 standard deviations above the mean for their behavior over the past 3.5 years (bull market assuming this can be called one ). The activities of the smallest equity options traders suggests they are collectively betting on the four year cycle low coming very soon.
They could be right, but their track record over the past (nearly) seven years suggests their collective batting average for correctly calling future market direction is not very high.
What at least to me is very interesting right now, is the activities of the largest retail equity options players, those trading 11 and over contracts per transaction. The OCC breaks down the retail customer BTO transactions into three categories:
1) 1 to 10 contracts per transaction (discussed above)
2) 11 to 49 contracts per transaction
3) 50 or more contracts per transaction
I have recently began to separate out the BTO call and put numbers from categories (2) and (3), but am only about 50% done in culling out the data from over 350 weekly files. Therefore, the following discussion includes all retail BTO transactions greater than 10 contracts, usually 80% of the total BTO volume on all exchanges. Approximately 70% of the BTO volume of transactions greater than 10 contracts, are in the 50 contract and above category.
The "large retail trader" BTO PC ratio continues to be very high as it has over the past few weeks, running over two standard deviations above the mean for their typical BTO PC ratios. One could conclude there is likely non-member firm hedge fund activity included in this data, so the motivations are not nearly as clear cut as those with the smallest trader BTO data.
Last week's large trader BTO PC ratio was 1.01, only the eighth time in nearly seven years this BTO PC ratio has been 1.00 or more. If one looks closely, you will notice these extremes usually occur a week or two prior to a bottom, or a consolidation where prices rise out of.
Investigating these large trader events where the BTO PC ratio was greater than one, a "future price returns" table was assembled illustrating the Friday over Friday closing prices for the next several weeks going forward. The weakness in this approach, is the intra-week action in prices, but didn't have the time to parse out the intra-week price highs and lows, only Friday closing prices are used.
As the table suggests, most of these events, five, transpired after the March 2003 bull price kickoff. Fibonacci numbered time frames were arbitrarily used for determining Friday over Friday price returns. A far more rigorous approach is needed in examining day-by-day price action... but the options data is of the weekly sort.
The price returns, although on-balance positive, were not eye-popping within the eight week time frame addressed. Further work will be needed to look at the longer term returns.
Overall, the large trader PC ratio correlated with the SPX weekly closing prices is -0.56, which suggests an inverse relationship with price, but the large trader PC ratio-price correlation is not nearly as significant as the smallest trader PC ratio-price correlation, which is -0.73.
What I found particularly interesting is the correlation of the large retail trader PC ratio versus price since the spring of 2003: 0.05, which is no correlation at all !! This is likely due to the large growth in non-member hedge funds over the past few years.
So why bother with the large trader data? Something to do on a rainy Sunday . However, by closely examining the large trader PC data, extremes as we currently witness, are usually followed by upside movement in prices. What hasn't transpired over the past seven years, is the cluster of extremely high large trader PC ratios over the past few weeks.
With many price charts and internals indicators at or nearing important resistance zones, the outcome of prices over the next couple of weeks will unlock the mystery of what this current cluster is telegraphing.