Finally, panic has set in. Now I want to see the markets shake out these weaker investors, and allow the smart money to prosper. Moving the big cash guns around to bear, and waiting for the sign... I may have just seen it... read on...
CHICAGO, Aug 21 (Reuters) - A panic-like activity in put options might be a saving grace for the U.S. stock market, which has been pummeled by ever growing concerns over Asia and Russia on Friday, traders said.
The put/call ratio for individual equity options on the Chicago Board Options Exchange -- the world's largest equity options bourse -- spiked up to 1.27 as of 1230 CDT/1730 GMT, the highest level in years.
''The equity ratio is at a level not seen (but) once or twice in a decade,'' said Jay Shartsis, director of options trading at R.F.
Lafferty & Co.
''It's an extremely high number, indicating panic,'' he noted.
The ratio is regarded as a contrarian directional indicator for the market and a level around 0.50 -- two calls traded for every put -- is usually considered neutral.
The Dow Jones Industrial Average (^DJI - news) fell more than 280 points to a low of 8328.20 at one point before clawing back above 8400 in mid-afternoon.
Market-watchers noted that the ratio been fairly high lately as the market's steep drop from July highs began to bump against support but that the spike up today was exceptional.
''That's way off the charts,'' Joe Sunderman, an analyst at Schaeffer's Investment Research, of today's put/call ratio.
Chris Cadbury, publisher of Cadbury Fax Service, added that the put activity, combined with the strong support the market has bounced off of in the last few weeks, was very positive.
The S&P 500 index (^SPX - news) has, for instance, bounced off its 200-day moving average four times, he said. The index fell nearly 37 points to a low of 1054.92 earlier, just below the 200-day average, which came in today at 1055.79.
The S&P 100 index (^OEX - news) has also found solid support in the 520-area.
Cadbury added that sentiment indicators, most of which have been contrarian signals, generally showed a lack of bullish speculation.
"It looks like we're trying to put in a bottom," he said.
''It's so interesting the way the market has come down,'' he observed. ''In a sustained bear market, volume is light and movement is slow. This time around, it's fast with heavy volume -- it looks very much like a bull market correction.''
Traders added that today's August option expiration might have exacerbated the panic, helping a shakeout of the wrong-way
crowd.
Short-dated options have high gamma, the premium acceleration rate against stock price movements, and premiums on
one-day options can swing wildly.
OEX August 535 puts, for instance, saw their premium explode up to a high of 14-3/4 early from Thursday's 1-1/2 close and
then shrink back to around 4-1/2 in late trade.
''That's the kind of stuff that gets weak people out in a hurry,'' Cadbury said, adding that the selloff began in overseas markets
and U.S. stocks were merely following them.
''When there's a lot of bearishness, it's likely to turn up,'' he said. |
