As the stock market hovers at multi-year highs and reclaims lost territory from the February correction, retail option traders are surprisingly nonchalant. This is especially true for the option market focusing on the Nasdaq 100 index.
Most option market sentiment indicators afford us a contrarian interpretation. A few like the S&P 100 index and the NASDAQ- 100 Index Tracking Stock or the PowerShares QQQ trust (QQQ) are different. Either because they are the domain of institutional or more sophisticated traders, they can be taken at face value.
Back in mid-February 2011 the 10 day moving average of this put call ratio was spiking to levels that correspond historically to market tops. On February 15th it reached a high of 2.99 suggesting that option traders were trading three times as many puts as call options.
Previous to that, most recently, there was a spike up even higher towards the end of March 2010 which preceded the more serious correction that arrived in April 2010. While the historical record is not perfect, the probability is high that low levels for this put call ratio correspond to buying opportunities and high put call ratios to selling areas – with a possible lag of a few days to weeks.
So it is interesting to observe that while the Nasdaq 100 and the rest of the stock market proxies right now are either right at or above their recent highs, the signal from this indicator is rather benign. We’d normally expect to see put trading activity pick up concomitantly with higher stock prices. And in March it seemed to be doing that but then it reversed course (for charts, see Sentiment Overview).
Right now, the put call ratio is about as low as it was during the March 2011 lows. This, even though we are about 10% higher. The current situation is analogous to September 2010 when the QQQ put call ratio was low, even though the Nasdaq had rallied higher. At the end of September 2010 the put call ratio was 1.49 almost the same as now. The QQQ continued higher, breaking above the April 2010 highs.
Now, just as then, the QQQ option traders are positioned for the stock market to break out higher. Looking at retail option trader activity through the lens provided by the OCC we see this general mood confirmed. Retail traders are generally not positioned in a very lopsided fashion, suggesting that they are surprisingly skeptical about the market’s future possibilities. And since this data is interpreted from a contrarian viewpoint, it dovetails nicely with the QQQ put call option data above.
The only divergent view point at this time in the options market is the continuing bearish stance of the S&P 100 index option traders. As I’ve pointed out repeatedly during the past few months, the OEX options market has been stubbornly bearish and busy building a very sizable position to profit from a price decline. The 10 day moving average closed at 2.02, the highest since February 2007 and June 2003.