Good piece in Barrons today may shed some light on the recent divergence between the
index put-call ratio and the equity put call ratio. Here's a rather lengthy quote:
"Lately the equity put-call ratio has been hovering around 54:100, that is, 54 puts
traded for every 100 calls. That's a sign that individuals are deeply pessimistic,
which, because the little guy is a contrarian indicator, is a bullish sign for the market:
It tends to foretell a bottoming and a turn upward. Put trading is currently about the
same level where the market found a bottom after last July's swoon.
``The market will rally when there's fear, and peak when there's complacency,''
Hegarty explains. Problem is, the index put-call ratio is showing that complacency:
The level of call trading in the S&P 100, also known as the OEX index, far
outweighs put trading, an extremely bearish indicator. More worrisome is that so
far this year, the index put-call ratio has been the better barometer of market
direction.
Historically, the equity put-call ratio has been considered the most contrary
indicator because it takes the pulse of the least sophisticated,
farthest-out-of-the-loop, the individual investor.
The index put-call ratio, on the other hand, is thought to be distorted by
smart-money tactics such as hedging. In fact, many are skeptical of the bearish
signals it's sending and suggest that a lot of the call activity stems from traders who
sold calls and bought puts and are now collecting the premium and buying back the
calls. Then there are those who think professional hedgers have become more
focused on individual options as the indexes have gotten more expensive and more
influenced by just a fraction of the stocks that comprise them, and so the equity
put-call ratio could be equally distorted.
Considering that the Chicago Board Op- tions Exchange sprang to life during the
last great bear market and the S&P 100 index was created a decade later in 1983,
this could be a real test of the predictive capabilities of the options market."
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