For the past while I’ve been harping on the lopsided positions that are being taken by the S&P 100 index option traders. The first time that I shared a chart of the increasingly alarming OEX option trading activity was in mid-February 2011.
From then on things just got more and more extreme. The week after, the OEX put spree pushed the open interest and the put/call ratio to heights unseen since late 2007. Towards the end of February, when the equity market formed a short term top, the 10 day average for the OEX put/call ratio was about 2:1 – twice as much activity in bearish puts as bullish calls.
Leaning into the short side turned out to be the correct call as the market retraced about 6% into mid-March. As you’d expect, OEX option traders shifted away from puts in response. But the retracement was shallow and brief as the market suddenly started to climb once more.
This week, the OEX option trading activity is once again clearly on the bearish side as many more puts are traded relative to calls.The 10 day moving average reached higher than its top in February. And in fact, we’d have to go back all the way to August 2000 to find a higher level of bearishness in this option market.
On August 18th 2000 (not shown on above chart) the 10 day moving average of the OEX put call ratio was 2.41 – just a few days later, the S&P 100 index reached a few points higher and made a double top to form the massive technology bull market top that is still in effect.
I’m loathe to rely on one single indicator, no matter how good it may be. In the weekly sentiment overview I’ll go over a bit more about this and also as usual include other measures of sentiment which will round out the picture and provide a more measured idea of where the market stands.