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mortiz

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Reply with quote  #1 
Although there is a lot of evidence lower price lows are on the road-map, retail options action is suggesting a strong bounce is getting close allowing the relief of longer term oversold indicators to diverge with lower lows in price going forward.

The retail equity options indicator to be discussed in this thread is the delta between the Buy-To-Open (BTO) average contract premium put-call (PC) ratio and the BTO volume PC ratio.  This data series has only nine years of history, but we can compare the recent action with the 2002-2003 bear market lows.  It is unfortunate this data doesn't cover the 1987 crash.

The first chart is the total (all transaction sizes) retail BTO PC spread between premiums and volume.  What is interesting, is during the recent crash, total retail BTO volume PC ratios have not reached nine year extremes, currently around parity (BTO call volume even with BTO put volume) comparable to the 2002-03 price low BTO volume PC ratios. Total retail BTO volume PC ratios rose as high as 1.25 in March 2007 and March 2008.

However, the BTO put premiums retail traders are willing to pay now versus BTO call premiums are at record highs, elevating the BTO premium-volume delta to record highs for this series' history. When the blue curve (BTO premium-volume PC ratio delta) is less than zero (black dotted line), the BTO premium PC ratio is less than the BTO volume PC ratio.




When looking at this same BTO premium-volume PC ratio delta for the smallest equity options traders, those trading ten or less contracts per transaction, the BTO premium-volume PC delta has not reached nine year extremes. The smallest trader's BTO volume PC ratios have been in the 0.75 range of late versus the 0.95 range during the 2002-03 bear market lows.

However, the smallest equity options traders have paying dearly for their BTO puts, running up the BTO premium-volume PC ratio to six year highs.



Before the current bear market has run its course, I would expect the small trader BTO PC ratios to elevate to levels at least as high as the 2002-03 extremes. 

For the nearer term, the majority of retail equity options BTO premiums are getting heavily skewed toward puts, and are high enough where a tradeable bounce on the long side is getting close, flushing out some of the elevated premiums being paid for puts, before mounting another price down leg.

FWIW

Randy

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