Sunday, February 03, 2008

What to Expect When Equity Options Traders Are Bearish

The above chart shows how spikes in the 20-day equity put/call ratio have corresponded to intermediate-term market bottoms. When equity options traders are bearish, it's paid to look to the upside for short-term returns.

Going back to 2006 (N = 519 trading days), I note that we've had 85 days in which equity put volume has exceeded equity call volume. Five days later, SPY has averaged a gain of .33% (50 up, 35 down). That is considerably stronger than the average five-day gain of .03% (238 up, 196 down) for the remainder of the sample.

When the daily equity put/call ratio has been below .60 (N = 41), the next five days in SPY have averaged a loss of -.03% (20 up, 21 down).

All in all, when the daily equity put/call ratio has been above .80 (N = 262), the average five-day gain in SPY has been .23%. When the ratio has been below .80 (N = 257), the average five-day loss has been -.07%. This has been a useful sentiment measure. At present, the ratio is .76, a six-day low.


Relative Sentiment and the Put/Call Ratio