Huge Bets On Financial Sector Skew ISE Options Data

Since early December, we’ve gone over the eye popping data from the ISEE call put ratios: Retail Option Traders Go on Call Buying Frenzy (Again). As well, in the most recent weekly sentiment overview I hinted that the large bets on banking stocks like Citigroup could be causing or contributing to this extreme condition.

First I have to credit and thank Jason of SentimenTrader who mentioned this in one of his daily analysis reports and piqued my curiosity initially. As well, the folks at ISE have been very helpful and responsive.

When an indicator suddenly jolts above its historical pattern, it is wise to hold some skepticism and explore whether what it is telling us is reliable or whether some new factor has come into play to change the indicator. At first I wasn’t too dismissive of the sky high call buying from the ISE Sentiment because it was more or less confirmed by the CBOE put call ratio as well as other sentiment indicators (such as the weekly surveys). But still it is important to confirm the superficial signal from an indicator by looking at the underlying data. With that in mind, I’ve spent the past few days digging beyond just the headline end of day data that we normally look at. And that has paid off with some insight into the stupendous amount of call buying we’re seeing.

The time period I looked at started on December 1st 2010 up until yesterday. This time period contains the spike in the ISE sentiment. For example, the 5 day moving average of the ISE equity only call put ratio peaked at 281 on December 16th. And the 10 day moving average of the same ratio peaked at 266 on December 14th 2010.

A cursory glance at the most active issues on the ISE options exchange showed financial stocks such as Citigroup (C), JP Morgan (JPM) and Bank of America (BAC) occupying the top spots. Looking at the daily data more closely confirmed that these financial stocks have not only been extremely active, accounting for a significant portion of the options activity but that this activity has been consistently and astronomical skewed towards call buying versus put buying.

Citigroup (C) garners the top spot. From December 1st to December 21st it was in the top 10 most active issues. And often either in the top 5 or the single most active issue on the ISE. Within the 15 day trading period an average of 53,554 call options were bought to open a trade daily. This compares to an average of just 6,067 put options bought to open a trade daily. So on average almost 9 times more Citigroup (C)calls were bought than puts!

Bank of America (BAC) was second in popularity. From December 1st to December 21st it was in the top 10 most active issues every day except one. And often either in the top 5 or the single most active issue on the ISE. Within the 15 day trading period an average of 24,590 call options were bought to open a trade daily. This compares to an average of just 4,775 put options bought to open a trade daily. So slightly more than 5 times more BAC calls were bought than puts!

JP Morgan (JPM) was the third most popular banking stock spending 3 days in the top 10 most active. Within the 15 day trading period an average of 4,347 call options were bought to open a trade daily. This compares to an average of just 1,372 put options bought to open a trade daily. So slightly more than 3 times more JPM calls were bought than puts!

Finally, while technically not an equity issue, I also looked at the Financial Select Sector SPDR ETF (XLF) because it was in the top traded issues and obviously, it provides exposure to the same sector (with all three individual stock mentioned above in the top 5 of its holdings). Within the 15 day trading period an average of 15,537 call options were bought to open a trade daily. This compares to an average of just 3485 put options bought to open a trade daily. So about 4.5 times more XLF calls were bought than puts!

So there definitely is more than meets the eye. The volume of options dedicated to banking stocks and the incredibly lopsided amount of call buying in those issues is having an effect on the equity only ISE Sentiment data. But I don’t think that this can necessarily then discount the value of this option sentiment indicator. Clearly, it is enough to skew the data but we are seeing call buying in other issues as well. This lopsided and persistent preference for call options in the financial sector has excarcerbated the ratio and propelled it to record highs.

However, if we were to discount or remove it from the equation, I don’t think that it would make a major difference in the over all picture. As well, I’m not sure why we would want to suddenly excise a whole sector just because we are seeing traders rush into it en masse like this. Or could it possibly be a technical issue? The ISE filters the options data and only looks at purchases (long positions) of options to open a trade. But could there be some strategy being employed that circumvents this filter?

As well, this analysis opens up further possibilities to explore. For example, what is the outlook for those banks? what is the outlook for the sector as a whole? How is the breadth and technical condition for the sector?

These are the questions I’m pondering. But as always, I welcome your feedback and insights.

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6 Responses to Huge Bets On Financial Sector Skew ISE Options Data

  1. DrBohica says:

    This analysis would be more meaningful if it was compared to prior culminations in call-buying. The hidden assumption is that prior call-buying sprees were not due to buying within a particular sector.

  2. Pingback: Banking Sector: Short Term Overbought | tradersnarrative

  3. Pingback: Sentiment Overview: Week Of December 24th 2010 | tradersnarrative

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