Equity Call Volume Takes Off Amid Crazy Week for Stocks

The SPX and VIX sent up a rare divergence signal, as did the Dow and Nasdaq

Dec 6, 2017 at 3:15 PM
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It's been an interesting couple of weeks in the stock market, and I'm not just talking about the bitcoin explosion. Not only did the S&P 500 Index (SPX) and CBOE Volatility Index (VIX) -- or the stock market's "fear gauge" -- flash a rare divergence signal, so did the Dow Jones Industrial Average (DJIA) and tech-rich Nasdaq Composite (IXIC) -- sending up an alarm that sounded before the dot-com bubble burst. Against this backdrop, options volume has gone haywire lately, and the SPX and Nasdaq are in danger of their longest losing streaks in months.

Call Volume Explodes

The Options Clearing Corporation (OCC) reported equity options volume of more than 23.6 million contracts on Wednesday, Nov. 29 -- the most since early June. For comparison, the year-to-date average for equity options volume at the end of November was just 14.7 million.

Most of those options were calls, with close to 14.5 million contracts traded last Wednesday -- the highest since December 2012, according to Schaeffer's Quantitative Analyst Chris Prybal. The equity-only one-day put/call volume ratio of 0.64 was the lowest since early August 2016.

Echoing that, call volume on the major indexes rose by 37% over the past 20 sessions, while put volume inched just 12% higher. The 10-day average of the equity-only buy-to-open (BTO) put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and Nasdaq OMX PHLX (PHLX) fell to 0.489 on Monday, marking the lowest reading since mid-July 2014.

10day bto pc ratio

As Schaeffer's Senior V.P. of Research Todd Salamone advised earlier this week: "continue to use call options to participate in the record-breaking equity rally. Call options give you leverage, and it is an outstanding way to minimize your dollars at risk amid uncertainties on both the political and economic fronts."

Losing Streaks on the Line

As alluded to earlier, the S&P 500 Index and Nasdaq are in danger of extending their losing streaks to a fourth session today. If that comes to fruition, it would be the SPX's longest losing streak since March, and the IXIC's longest since October 2016.

SPX after 4-day losing streaks since 2012

Nasdaq 4day losing streaks

However, if recent history is any indicator, another loss today could bode well for the indexes. The SPX and Nasdaq both averaged stronger-than-expected gains looking out three months after losing streaks since 2012. For instance, one month after a losing streak, the SPX was up an average of 2.42%, while the IXIC was 2.83% higher. That's more than double the index's anytime average one-month returns since 2012.

spx after losing streaks

nasdaq after losing streaks



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