Speculators Buying Puts

[Steven Vincent]

Incredibly, in the face of this rally equity speculators are buying puts. This is very BULLISH from a contrarian perspective.

[Mark Lytle]

Don't get too excited...peaks in call buying preceded tops by a few days, recently. I have taken your chart and inverted it...and placed it at the bottom of two charts, one of the $SPX and one of the $RUT (using IWM). I have placed red 'down' arrows approximately over recent peaks. There are dotted red lines aligned with the peaks in calls....A longer time frame gives a truer perspective...

[Mark Lytle]

Here is the same thing using SPY instead of $SPX , similar results bu I found an earlier top to the far left (mid April 2009) in this example that adds to the list of tops that have conformed to this pattern...

[Steven Vincent]

Trying to pick a top in a strong bull trend is not a good idea. Any basic trading book will make the point that top and bottom picking is not good trading. Hopefully this is an intellectual exercise and does not involve real money.

[Mark Lytle]

I'm not picking a top here, necessarily...I'm just pointing out that your assumption about P/C ratios as stated in this post, was not tested...Also, it's O.K. to hypothesize about tops and bottoms...It goes without saying that everyone does it..We always wait for verification, don't we...? I would add that we are likely, pretty close to one...

[Steven Vincent]

Even as the "dumb money" equity players are buying puts into the rally, the "smart money" (fund managers ect) are de-hedging and no longer buying puts. This expresses confidence by pros that the uptrend is intact. BULLISH.

[BullBearGirl]

Could you please tell us how we can know which kind of investor is buying puts and which isn't? I can't see it in the chart.

Thank you

[Steven Vincent]

If you use stockcharts.com the symbol for the TOTAL put/call ratio (equity and index combined is $CPC. The symbol for EQUITY ONLY put/call ratio is $CPCE. And for INDEX ONLY is $CPCI

Generally, professional traders regard those who buy equity options as the dumb money. The general public which usually buys the top and sells the bottom. If that ratio is high, a rally is usually not far away and vice versa.

Professional fund and money managers use index options to hedge positions against risk. Usually they are long, so there is a bias towards puts for hedging purposes. When that ratio drops it can be very bullish because it means that the pros are relaxed and not feeling that there is too much risk in the market. (Of course they are not infallible, but generally this is the case).

Although most don't use the combined, total ratio, I do look at it along with the other two.

Hope that helps.

[Steven Vincent]

If you use stockcharts.com the symbol for the TOTAL put/call ratio (equity and index combined is $CPC. The symbol for EQUITY ONLY put/call ratio is $CPCE. And for INDEX ONLY is $CPCI

Generally, professional traders regard those who buy equity options as the dumb money. The general public which usually buys the top and sells the bottom. If that ratio is high, a rally is usually not far away and vice versa.

Professional fund and money managers use index options to hedge positions against risk. Usually they are long, so there is a bias towards puts for hedging purposes. When that ratio drops it can be very bullish because it means that the pros are relaxed and not feeling that there is too much risk in the market. (Of course they are not infallible, but generally this is the case).

Although most don't use the combined, total ratio, I do look at it along with the other two.

Hope that helps.

[BullBearGirl]

Thanks