BigTrends

The CBOE is expanding their Weekly Options program.  These are options that have a duration of 1 week, hence "Weeklys".  Recently, the CBOE changed the issuing of new weekly options so that they begin trading every Thursday and expire the following Friday.

Several major indexes have these options available, such as the SPX and OEX.  Newly added are some major equities -- the latest CBOE data shows the following stocks and ETFs are now available on weekly options:

Stocks:  AAPL, ABX, AMZN, BAC, BIDU, BP, C, F, GOOG, GS, POT, XOM

ETFs:  EEM, FAS, FAZ, GLD, IWM, QQQQ, SPY, XLF

Indices:  OEX, EO, DJX, SPX.

The volume on the weekly options is not a huge factor at this time, although for the OEX it has become fairly popular.  The availability of quotes for these options is still limited on many of the large broker quote/trading software, which will greatly limit the amount of public trading and interest we will see. 

New developments occur all the time in the trading arena and some catch on more than others -- for example, futures on individual stocks have not made a large impact thus far.  At this time, we'll be continuing at BigTrends to focus on the more popular Monthly options due to the larger liquidity, open interest and holding periods.

Despite the market selloff, the latest leg of which began last Friday, we haven't seen an appreciable rise in the CBOE and ISE Equity Put/Call Ratios.  We track these nightly along with other important indicators in BigTrends Trader's Edge (call 1-800-244-8736 for information on Trader's Edge).

The chart below has an overlay of the S&P 500 Index ETF (SPY) on the top, followed by the CBOE Equity Put/Call Ratio and the ISE Equity Put/Call Ratio with Bollinger Bands.  Normally, we would expect to see Put/Call readings over 1.00 during times of a clear market panic -- these often precede significant market bounces, as they mark periods of panicked Put buying by the public.  However, both of these readings are around midlevels, which indicates a fairly even amount of Call & Put buying.  This is a relative sign of complacency among traders, given the negative market price action and poor economic news coming from around the world on an almost daily basis recently.

Short-term bottom line is continue to be cautious of this market and look to profit on the down side from market bounces.

For those of you that receive our nightly Trader's Edge Report you know the importance of sentiment in the market place--investor sentiment can help you determine when the so called fear and greed on Wall Street is primed for reversal.  In my trading Iconsistently use four different sentiment tracking charts, (1) CBOE Volatility Index, (2) CBOE Equity Put/Call Ratio, (3) RYDEX Ratio, and (4) ISE Call/Put Ratio.  Each has it's own unique system to highlight market reversals (covered each night in Trader's Edge), but they all employ a similar contrarian strategy.

The reason I bring this up today, is based on the current sell-off in equities--as it stands right now, it's the strongest two day sell-off since last summer.  As of now the CBOE Equity Put/Call Ratio is at extremes again - we measure extremes based on Bollinger Bands and as of now we are clearly outside the upper band.  This means the Put/Call Ratio is very high relative to the past 20 days or that FEAR has reached an inflection point.  The CBOE Equity Put/Call Ratio simply looks at the number of equity puts (bearish) traded compared to calls (bullish) traded, it's falls lower as market participants become more bullish and vice-a-versa climbs higher as participants become more bearish.  

Market reversals tend to occur when fear and greed saturate the markets.  In today's case we are seeing an extreme amount of puts traded, so much that it is unhealthy for the current trend.  Take a look at the graphic below to see recent patterns with the Equity Put/Call Ratio and the S&P500.

CBOE Equity Put/Call Ratio

Friday's CBOE equity only Put/Call Ratio came in at 49%.  This basically means that twice as many Calls were traded as Puts.  This is a fairly extreme reading, with a very high level of Call buying.

Looking back at historical data (from the CBOE.com website), the most recent reading that was lower than 49% was on July 12, 2007.  What happened after the July 2007 reading?  If you look at the chart below, you can see that the market moved lower shortly after ... and it basically marked near a significant top in the markets.



So one could certainly view the very low put/call reading as a contrarian bearish signal ... but it must be noted that the 2007 reading came after 4 strong years in the market, while this time around we are in the midst of a rally from extreme panic lows.

Yesterday the S&P 500 Index (SPX) gained about 3%, while the CBOE Volatility Index (VIX) also gained over 3%.  This is an unusual dichotomy, because volatility usually goes down when the market rallies.

Alan Farley's comments on this:

"The S&P 500 and VIX have risen in tandem 26 times since August 2007, including yesterday's 3.48% VIX gain, coupled with a 2.96% S&P rally.
In the follow session, the S&P has fallen 18 times for an average loss of 1.6%."

My take is that some of this is due this being an Options Expiration Week combined with a lot of big earnings reports.  The key with yesterday is that the CBOE Equity Put/Call Ratio (EPCR) plummeted.  What this means to me is that the big VIX move on Wednesday was likely due to massive Call buying.  That is the most likely combination of a rising VIX/falling EPCR.

So was this Call buying "smart money"?  Thus far, the jury is out ... the markets are flat/mixed today after 3 days of strong gains.