Record CBOE Options Volume and Put/Call Ratio Over 1.00

Editors note: Moby Waller from shares a special column with us today. 

After last week’s crazy action, Monday’s trading set some more option volume records. It shows the continuing growth and use of options (especially on the VIX and ETFs) among both small and large investors/traders.

According to the CBOE for the second consecutive day trading volume reached an all-time high on Monday. Over 10 Million contracts traded hands again, the fourth time in history this has occurred and the biggest single day volume ever — topping the "flash crash" of May 6 2010. VIX options volume, VIX futures volume and total ETF options volume have also set records in recent days..

However, even with this giant volume the Equity-Only Put/Call Ratio on the CBOE didn’t surpass the 1.00 threshold on either Thursday or Friday. The readings for those days were 0.96 and 0.93, respectively. A reading below 1 indicates that less Puts than Calls were traded, even on those huge market down days. The Equity-Only PC Ratio does include ETFs such as (SPY) (and inverse/ultra ETFs), but doesn’t include indices like the S&P 500 (SPX).

Finally on Monday this measure of option trading sentiment surpassed 1.0, coming in at a 1.08 level. This came as stocks shed another huge amount of value and the SPX closed in on the key round 1100 level.

Prior to Monday, the most recent times when this Ratio surpassed 1.0 were in June 2011 – June 10, 15, 16, 17. Before that it hadn’t happened since 2009. In the past 5 years, the occurrences were on January 7 2009, in September/October/November 2008 (Sept 15, Oct 9/10, Nov 6/19/20/21), a few times in March 2008 (6th, 14th, 17th), January 15, 2008, and few times in August 2007 (14th,15th,16th) – and before that were none since August 2004.

I broke down these incidents of very high Equity Put/Call Ratio readings to analyze if they showed trends in terms of trader panic and market timing. Several of the data points were "stand-alone" while others occurred in small bunches in the same month — those were grouped together. This basically made for 8 previous instances. Take a look at the dates below and the SPX performance in the 1, 5, 10 and 20 trading days afterward:

Put/Call Ratio > 1.00 & SPX Performance

This is a fairly rare event over the past 5 years, as you can see. For the "bunched" events, we used the final day the P/C Ratio was over 1.00 as the measuring point for SPX performance. The average market performance following all of these events was very neutral over the 5, 10 and 20 trading day time frames (corresponding to 1 week, 2 weeks, and 1 month).

There was a noticeable trend in this admittedly small sample size — see the blue box at the top of the graph. When the CBOE ratio had a "stand-alone" reading over 1.00 which was not followed by any more high readings in the near-term, it was a bearish indication for stocks. The SPX was down 3.0%, 6.0%, and 7.9% in the 5/10/20 day time frames following this. One can assume the logic behind this that the market was complacent following a big down day or very bad news (or some huge Put buying), and the longs got hurt by further downside.

The other sample group is when there were multiple readings over 1.00 in the same month, usually within a 1 week/2 week time frame. Following the final reading over 1.00, the SPX was up 3.2%, 5.4%, and 5.0% on average. Here the logical conclusion is that after a period of extended bearishness (Equity P/C Ratio over 1.00) the market crossed up the bears with a strong rally — this could be viewed as typical contrarian analysis/behavior, but also could indicate the sellers/bears were worn out after so much negativity.

So now we come back to today’s reading over 1.00. At this time, we don’t know if this is a single-time occurrence or if there will be several more in the coming days/weeks. Considering that we didn’t breach 1.00 on last Thursday or Friday, it’s possible that this may be a one-off … but the sense of panic and huge drops we’ve seen would also point to heavy Put buying continuing.

How is this going to play out? Well, targets I had focused on for support with the SPX have been breached (the Fibonacci 1228 and round 1200 levels) … we closed right around another long-term 50% Fibonacci level of 1121, just above the 1100 round strike — which certainly could act as support. With another big down opening likely ahead of us, below those levels lies another big potential support of 1014 and the psychologically important 1000 level. And then there’s the shudder-to-think 666 low of March 2009 …

Keep an eye on these measures of sentiment like the VIX and Put/Call Ratios to see if/when the downside punishment wil continue or a market bounce is imminent, and if any rally attempt will stick. Likely when we do "bottom out", we’ll have rallies combined with a volatile consolidation trading range.


Moby Waller