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Strategies & Market Trends : Systems, Strategies and Resources for Trading Futures

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To: Gary E who wrote (12064)	1/8/1999 5:42:00 AM
From: Patrick Slevin	Read Replies (1) of 44573

I received this in an e-mail from a CBOE MM; I thought you may be interested so I'm passing it on. ------------------------------- Just a brief observation....Option Volume at CBOE the last few days has been huge. Normally this would bring one to the conclusion that the expiration rolls were occurring this week. It has grown quite common to sell the rolls occur the week before expiration, especially in the last few years. That DOES NOT seem to be the case. These last few days the volume has included only modest index volume where the rolls would occur. Today's volume included almost 60,000 Leaps. This kind of activity seems to indicate more of a day trader mentality, especially given that the volume has not been accompanied by a significant rise in Open Interest. Put/Call ratios, which I'm a believer really are no longer a credible indicator, are also fairly ordinary. Conclusion: I'm not certain....I expect with nominal stock prices viewed by some to be so high that there is a greater use of ITMs as day trading instruments. Additionally the mix of retail/institutional business has tipped a bit more toward the institutional side over the past couple of day, but again the numbers are not dramatically out of line. ------------------------------------------------ Expanding on the reason for his reluctance to believe in P/C ratios, he offered the following---- ------------------------------------------------ My opinion is that over time the p/c ratio has become almost totally irrelevant, except at extremes. Extremes are numbers like 1 in equities. My comment related to the fact that the extraordinary volume was not accompanied by anything other than ordinary p/c ratios. The reason I believe it is much less relevant today than in the past is that in the past the lion's share of option trading was directional retail whereas today about 70% of total volume is really non directional hedge trading. you can't make the claim, anymore, that option volume is a true contrary indicator. It comes back to the fact that most of the volume today is not a straight bullish or bearish bet. the contrarian view also used to exist from the view that 90% of options go off worthless....and that has never been true. Here is the dilema.....let's say a customer buys a put to protect a long stock position. That put purchase results in the creation, by the customer, of what is effectively a call option....Stock + Put = Call(I'm leaving out the carry). Years ago this use of options was rare....people bought puts when they were bearish.....very little hedge trading actually occurred. Today most of the trading is hedge trading and the floor volume is dominated by spread trading. This makes it very difficult to draw a clear picture from volume alone. If you add open interest this doesn't necessarily clear the picture because the actual calculation for Open Interest also clouds the intention of the user and the floor community cannot in and of itself create open interest. Having said all that it just simply isn't easy to use the data to draw a "clear" conclusion. Now add volatility to volume and OI and for a while that actually worked very, very well. Guess what..volatility numbers are now bizarre(my term). So many issues have an implied of over 100%. In reality, although I can model a vol. of anything, a value of over 100% is a practical impossibility. It more likely describes an expected price distribution would DOES NOT LEND ITSELF to option modeling. The hi vol. numbers really seem to imply a dealer community wanting to create "values" at which they can survive given that THEY MUST trade.

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