Put/Calls and stuff
I knew I had one Bushmills too many;
I tracked equity Put/Call for about 7 months from May thru early January. It did not thrill me. Bearish Equity Put/Call scenarios seemed to arrive at the same time as Bullish Index Put/Call scenarios. I used 0.85 as a combined Neutral environ, 1.05 as a Neutral Index, and 0.68 as a Neutral Equity. Don't ask me why, I chucked the entire thing as it never seemed to have consistent results. No matter what, for example, the equity P/C was always curiously low. Even so, with the exception of October, no matter where the Index P/C was the market never seemed to move (as I would have anticipated) in the direction that the indicator seemed to suggest.
I often feel it's a trailing indicator. Perhaps one that people go back and say "LOOK! Look at that P/C Indicator! Of course the market had to <insert movement here>". Perhaps it's a crowd issue. You say, I say, Kevin says, the market is going down. We convince each other and all buy puts. Take this to the scenario of a mob psychology and bing! High Put/Call ratio. The converse of this, if there was a high Call to Put ratio, would not you or I be just the slightest bit unsure of our bearish stance and perhaps buy calls ourselves? Look at the goldbugs. They have been doing it for years.
One very real problem with Index P/C ratios is that no one really says where they are. How many of these calls are ITM, how many OTM, and the same with puts so who knows where the pressure is? If I were a reasonably sized arb with a large ITM call position I would make it my business to try to determine where most of the money was on this so I would know whether there would be a good shot at gunning the market into expiration or not.
It just occurred to me that I'm getting too far afield on this.
Your brokers sound somewhat correct, I suppose. I would think more of the pro money has more of a tendency to go into Index vs. Equity, with the occasional exception.
Did you ever notice this in the morning, speaking about the pro vs the public? I don't know if it still plays out alot, but during Amateur Hour often you could guess the move in the second hour or so. If the volume on the strike just OTM on OEX puts was greater than the volume on the strike just OTM on OEX calls it would be a tipoff that the public was buying puts so the market should go up. Another tipoff was the way the puts got priced vs the calls. Are the MMs pricing the calls at a higher premium than the puts? If so, maybe they don't want the puts...why I wonder?
I must pause to ask, is my thought pattern more organized when I have not had a Bushmill's?
I thought not.
Anyway, even though I actually tracked these damn ratios for only about seven months I have watched the indicators for years and got nothing out of it for my trouble. To me, at least, it seems there are too many reasons why a professional would own or be short an option and without a fortuitous piece of information here and there it will never be of much help to us. As far as short equity calls anyone who has any sense will either cover them, roll them out, or just does not care and will let the stock go.
From the professional point of view on equity calls, BTW, remember that MMs often take positions in options to hedge large inventories, whether the inventory is a long one or a short one. That's one thing I forgot that your brokers did not mention.
Now, if you have read this far, I'll bet you it will be a cold day in hell before you ask me another question that requires an intelligent answer. |
