Where Have All the Put Buyers Gone?

Another week, another churn. And as July 4 inches closer, it's unlikely we get much of anything interesting in CBOE Volatility Index (VIX) Land in the next week. But maybe there's something brewing in Options Land?

Despite the lack of direction, CNN's Fear and Greed Index remains in Fear Mode. Well, it's less Fear than we've seen lately, but it's still modestly red.

The breakdown is actually interesting. Options sentiment is actually pushing the index higher, with the "Put and Call Options" indicator registering in Greed territory.

"During the last five trading days, volume in put options has lagged volume in call options by 38.82% as investors make bullish bets in their portfolios. However, this among the lowest levels of put buying seen during the last two years, indicating greed on the part of investors."

A better description is more "a lack of bets on both sides," with a higher "lack" in the puts. But hey, it's unusual to see such a dearth of puts on a relative basis. And it could be meaningful, except I'm not so sure it's real. Remember the ISEE Index? This, from the International Securities Exchange (ISE):

"The ISE Sentiment Index is a unique put/call value that only uses opening long customer transactions to calculate bullish/bearish market direction. Opening long transactions are thought to best represent market sentiment because investors often buy call and put options to express their actual market view of a particular stock. Market maker and firm trades, which are excluded, are not considered representative of true market sentiment due to their specialized nature. As such, the ISEE calculation method allows for a more accurate measure of true investor sentiment than traditional put/call ratios."

I do like the methodology better. Standard put/call ratios do often overstate one side of the trade thanks to large rolls, plus there's no distinction as to whether the order initiator is buying or selling the premium. Ergo a big hedgie rolling a large position can skew everything and provide absolutely no predictive value.

The minus side of ISEE is that all those qualifications to get counted effectively drop the sample size too low to provide much meaning. But in any event, it's another well-thought-out way to view the put/call ratio, but with one important distinction: ISEE is call/put, thus high here equals low in put/call.

Anyway, here's how ISEE looks in 2015:

And we're absolutely nowhere. We can debate about the merits of one of these indexes vs. another, but I think it's safe to say that the net of the picture is much like we see in VIX. We're neither here nor there.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.