Options Signal Flashing for First Time Since Election

The S&P tends to outperform after this options indicator spikes

Apr 10, 2018 at 1:47 PM
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After a slow burn to record highs in 2017, the U.S. stock market has been on a roller coaster this year, with volatility ramping up in a big way. As such, the Cboe Volatility Index (VIX) -- also known as Wall Street's "fear gauge" -- kicked off 2018 with a bang, logging its best start to a year ever. Against this backdrop, near-term put open interest on a handful of major equity exchange-traded funds (ETFs) has surged, sending up a stock signal not seen since before the November 2016 presidential election.

Near-the-Money April Puts Prevalent

Specifically, the combined front-month gamma-weighted Schaeffer's put/call open interest ratio (FM-GW SOIR) on the SPDR S&P 500 ETF Trust (SPY), PowerShares QQQ Trust (QQQ), and iShares Russell 2000 ETF (IWM) surged above 6.0 last week -- the most elevated reading since 2011, according to Schaeffer's Quantitative Analyst Chris Prybal. In a nutshell, this indicates that near-the-money put open interest on SPY, QQQ, and IWM handily outweighs call open interest in the April series of options, which expires at next Friday's close.

FM-GM SOIR since 2008

Previous Option Signals Have Been Bullish

The combined FM-GW SOIR 10-day moving average officially topped 5.0 on March 23, marking its first trip above this threshold since Nov. 3, 2016. Below is how the S&P 500 Index (SPX) has performed after previous such highs in this metric, looking back to 2008. Notice that there were no signals in 2013, 2014, or 2017.

SPX after FM-GW SOIR tops 5

One week after a signal, the SPX has gone on to average a return of 2.1% -- about 10 times its average anytime one-week return of 0.2%, looking at data since 2008. Two weeks out, the S&P was up 3.3% -- again, roughly 10 times the norm -- with a positive rate of 88%. It's a similar story looking all the way out to a year after a signal, with the SPX averaging a gain of 20.3% -- more than twice its average anytime return of 9.8%. Plus, the index was higher 100% of the time both six and 12 months after these options signals.

'Fear Index' Tends to Drop After Signals

As you might expect, the VIX has plummeted after the combined SPY/QQQ/IWM FM-GW SOIR average tops 5.0. The "fear index" suffered an average loss at every checkpoint up to a year later, compared to average anytime gains. Only at the one-year marker has the VIX averaged an anytime loss of 1.8% -- though its post-signal loss of 50.2%, on average, far overshadows that. In fact, the VIX was higher 0% of the time six and 12 months out, compared to 40% and 42% win rates, respectively, anytime since 2008.

VIX returns after FM-GW SOIR tops 5

In conclusion, there's an abundance of near-the-money put open interest on the SPY, QQQ, and IWM -- more than we've seen in over a year. As Schaeffer's Senior V.P. of Research Todd Salamone noted on Monday, heavy SPY put open interest could translate into an options-related floor for stocks in the near term. What's more, after previous instances when the combined front-month gamma-weighted SOIR of the aforementioned ETFs went north of 5.0, the stock market tended to rocket higher, while the VIX plummeted.


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