Options Signal Flashing for First Time in 2017

The stock market tends to underperform when options traders display a notable appetite for calls over puts

May 12, 2017 at 1:23 PM
facebook X logo linkedin


As one might conclude by the CBOE Volatility Index (VIX) -- also known as the stock market's "fear gauge" -- at historic lows, the collective sentiment on Wall Street is far from fearful. While it doesn't seem we've hit the "euphoria" stage of the sentiment cycle that coincides with market tops, additional evidence of escalating optimism can be found in recent options trading trends, with one signal sounding for the first time in 2017. Below, we'll discuss how the S&P 500 Index (SPX) has reacted after previous signals.

Specifically, the all-exchange equity-only put/call volume ratio fell to 0.67 on Wednesday, marking the third straight reading below 0.80 -- something we haven't seen since mid-December, according to Schaeffer's Quantitative Analyst Chris Prybal. Further, it was the lowest daily reading since Dec. 15, 2016. "The giddiness of options traders is becoming apparent," he said, with the 10-day average of this ratio hitting 0.84, marking the lowest point since Feb. 22.

10day EO PC Ratio



Since 2014, there have been 15 instances of the 10-day average falling beneath 0.85, and counting just one signal every 30 trading days. As you can see on the chart below, many of the signals occurred after the S&P was off a dip. The signal sounded in November 2015, for instance, when the broad-market index was a few months off the August 2015 drop. It flashed again in April 2016, a few months after the worst January in years, and again July 2016, when the "Brexit" firestorm had receded. 

SPX during signals since 2014



However, going back to 2009, data indicates these signals have also preceded bouts of broad-market weakness. On average, the SPX has underperformed in the near term after these signals, of which there have been 30, averaging losses through the 20-day (four-week) mark. That's compared to modest anytime gains for the S&P during the same time frame, going back to 2009.

Further, while the SPX is higher, on average, beginning at the 25-day (five-week) mark after a signal, its gains are lighter than usual, looking out to 90 days (18 weeks). For instance, 40 days (eight weeks) and 60 days (12 weeks) after a signal, the SPX averaged gains that were roughly half its anytime gains. And at the 50-day (10-week) marker, the S&P was up just 0.9%, on average, following a signal -- only about one-third of its anytime 50-day return of 2.8%.

SPX after signal






 

Target Effortless Triple-Digit Gains Every Sunday Evening For Life!

This is your chance to triple your profit potential on Sunday evenings, without spending all your free time watching the market.

On Sundays, as a Weekend Plus subscriber, you’ll get up to 6 trades every Sunday, each targeting gains of 200% or more.

Start targeting gains like the ones our subscribers have seen recently, including:

213.3% GAIN on AutoNation calls
100.0% GAIN on Monster Beverage calls
100.4% GAIN on Walgreens Boots Alliance puts
100.4% GAIN on ON Semiconductor calls
257.7% GAIN on Dell calls

101.0% GAIN on Apollo Global Management calls
103.6% GAIN on JP Morgan  Chase calls
105.3% GAIN on DraftKings calls
101.3% GAIN on Airbnb calls
203.0% GAIN on Shopify calls
102.0% GAIN on Cboe Global Markets calls
100.9% GAIN on Boeing calls
102.1% GAIN on Microsoft puts
102.3% GAIN on First Solar calls
101.5% GAIN on PulteGroup calls
101.0% GAIN on Apple calls
209.4% GAIN on NXP Semiconductors calls
100.8% GAIN on Uber Technologies calls
100.4% GAIN on Academy Sports and Outdoors puts
102.2% GAIN on Trade Desk calls
100.8% GAIN on DoorDash calls
100.0% GAIN on Camping World Holdings puts
100.0% GAIN on Cboe Global Markets calls
100.2% GAIN on C3.ai calls
238.5% GAIN on Oracle calls

 
 
 


 
 

Rainmaker Ads CGI