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Guest Post: The Amazing Shrinking Put/Call Ratio!

Tyler Durden's picture


Submitted by Yves Lamoureux, Macquarie Private Wealth

The amazing shrinking put/call ratio!

Have you noticed lately the behaviour of the put/call ratio? Once you read the next few lines, you will agree with us that it is a rare event.

We have tracked this interesting behaviour since 2007. It is a compression event taking place in the ratio. You will notice it from a quick glance at our chart.

The put/call ratio is usually defined between a mathematical range. The best example is provided at the left of the graph. The ratio will bounce around from the mean to +3 standard deviation on a sudden drop of the Dow Jones, taking it to under 13,000.

That would be normal behaviour. In our present circumstances, something very different is happening.

The Dow started a downward trend in 2008. Sentiment is responding in a very different manner this time. With each successive drop, negative sentiment will rise less. The red arrows provide evidence of the high that was reached. From drops in the stock market beginning in early 2008, the P/C would only get to +2 standard deviation. The phenomenon continues as the ratio gets progressively compressed.

Movements in stocks toward the fall of 2008 got to + 1 standard at best.

I find the behaviour of this ratio in 2009 extremely interesting. The market’s rally provides further reduction in the swings. The P/C ratio fluctuates in an even more dramatically lower range. You will find the drifting between -2 standard deviation and the mean.

Remember that the recent high in January 2010 reflects a higher level of comfort, circled in purple, than investors felt at the 14,000 peak established in 2007.

The opinions contained in this report are those of the author and are not necessarily those of Macquarie Private Wealth Inc (MPW). Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor MPW makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. No entity within the Macquarie Group of Companies is registered as a bank or an authorized foreign bank in Canada under the Bank Act, S.C. 1991, c. 46 and no entity within the Macquarie Group of Companies is regulated in Canada as a financial institution, bank holding company or an insurance holding company. Macquarie Bank Limited ABN 46 008 583 542 (MBL) is a company incorporated in Australia and authorized under the Banking Act 1959 (Australia) to conduct banking business in Australia. MBL is not authorized to conduct business in Canada. No entity within the Macquarie Group of Companies other than MBL is an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Australia), and their obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any other Macquarie Group company. Macquarie Private Wealth Inc. is a member of Canadian Investor Protection Fund and IIROC.


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Wed, 02/17/2010 - 13:10 | Link to Comment hedgeless_horseman
hedgeless_horseman's picture

Is this ratio calculated using only in-the-money or all contracts?

Wed, 02/17/2010 - 13:10 | Link to Comment Master Bates
Master Bates's picture

The disclaimer is longer than the article!

So let me get this straight, people are becoming more complacent with the market because they know it's rigged?  Okay.  Well, don't fight the fed people!

Wed, 02/17/2010 - 13:10 | Link to Comment rhinotrader
rhinotrader's picture

As a option seller I see no fear out there. This market has too much support. It has to be the Fed or the banks that received TARP money. They won't/Can't let this market crash. Never seen such melt ups on no volume. Scary.

Wed, 02/17/2010 - 14:56 | Link to Comment orangedrinkandchips
orangedrinkandchips's picture

very scary. yesterday was good for me but i have a short in the spy. it didnt bother me that it jumped so high on such pathetic volume. option bullshit really.

But, just like in Jan. when everybody was ready for the melt up we got hit 10%. that sucked. But the buy up was such crapola and we knew it because of the volume.

same story now methinks. I dont trust it farther than I can piss.


Wed, 02/17/2010 - 13:13 | Link to Comment TheGoodDoctor
TheGoodDoctor's picture

Well, what happens when Helicopter Ben starts to pull out some of the 2.2 trillion in liquidity?

Wed, 02/17/2010 - 13:18 | Link to Comment Greyzone
Greyzone's picture

A better question might be what happens if he never does?

Wed, 02/17/2010 - 13:24 | Link to Comment deadhead
deadhead's picture

I used to think that the Fed would exercise some semblance of responsible behavior but have ditched that opinioin.  I don't believe for a second that the Fed will pull liquidity unless the bond vigilantes surface.

Bernanke is irresponsible and will push this to the limit of the beginning of a hyper inflation cycle.

I don't believe Hoenig either...i think he is just the one chosed to jawbone (read:bullshit) on behalf of the Fed.

I hope I am wrong.


Wed, 02/17/2010 - 14:21 | Link to Comment TheGoodDoctor
TheGoodDoctor's picture

Hey deadhead, I guess I was wondering what would happen to the put call ratio if/when the 2.2 trillion in liquidity were pulled. Would that cause it to go higher?

Wed, 02/17/2010 - 14:25 | Link to Comment deadhead
deadhead's picture

if the Fed pulled a few bucks in liquidity i think the equity market would freak out and tank big view is that the equity market is 99.99% propped by the Fed alone in collusion with the primary dealers.

i have lost all respect for the Fed over the years.  in retrospect, the respect that I once had was mistaken.

Wed, 02/17/2010 - 15:00 | Link to Comment orangedrinkandchips
orangedrinkandchips's picture

think of it...the Fed owns so much stock now it's "crazywhackfunky" as humpty would say...

they own AIG...sell options on that all day...

they own the Citi who are imbeciles.

you have to pump it up.


My question in that last 10% dip was..Where TF was the govt!


it's a put on...

Wed, 02/17/2010 - 19:15 | Link to Comment Anonymous
Sat, 02/20/2010 - 23:39 | Link to Comment Anonymous
Wed, 02/17/2010 - 13:18 | Link to Comment Anonymous
Wed, 02/17/2010 - 18:26 | Link to Comment BaseLine
BaseLine's picture

Once the BS good news runs out it will

ONEY and I care NOT who writes the LAWS," Nat_han R0thschi1ds
Learn the truth behind the fake recovery!!FED does that for the Financial Aristocracy and D1CTAT0RSHIP!

“What to do:

1. Allow the Financial Dictatorship where Wall Street Banksters Owns Congress?

2. A State trying to serve its Communities' Needs on Main Street while maximizing productivity and employment?

Is this a Difficult Decision? If you are a Bankster you want #1! If you are everybody eles you want #2!”

“Yes and they are using REAL LOANS - NOT FAKE FRAUDULENT PAPER that is "SURE to FAIL!" so Massive Casino Bets can be ” PAID to CR00KS!

Wed, 02/17/2010 - 13:19 | Link to Comment Gimp
Gimp's picture

Brooksley Born warned the "geniuses in the room" of  impending financial doom for the American people and their response - print more money! 

Thu, 02/18/2010 - 02:29 | Link to Comment Rick64
Rick64's picture

Brooksley Born was a true patriot thats why she didn't last long.

Wed, 02/17/2010 - 13:20 | Link to Comment buzzsaw99
buzzsaw99's picture

The Bernanke put trumps all.

Wed, 02/17/2010 - 13:23 | Link to Comment Anonymous
Wed, 02/17/2010 - 13:26 | Link to Comment BS Inc.
BS Inc.'s picture

I think some of it has to do with the availability of inverse ETFs, though. I'm sure there are puts purchased as part of the asset mix underlying those ETFs, but there are probably more OTC derivatives in there, too, which I don't think would show up in the put/call ratio.

You need to add in inverse ETFs to make the analysis apples-to-apples, in my opinion. Don't know how you'd do that right off the top of my head, though.

Wed, 02/17/2010 - 13:33 | Link to Comment buzzsaw99
buzzsaw99's picture

Watching puts expire worthless month after month can't be much fun for the buyers.

Wed, 02/17/2010 - 13:43 | Link to Comment percolator
percolator's picture

Something does not jibe with the chart above and the Put/Call charts from

Any ideas on why?

Wed, 02/17/2010 - 14:00 | Link to Comment Hephasteus
Hephasteus's picture

So HAL plus mega call money=big crash.

HAL plus mega call money hiding mega put money=squid vs predator.

Wed, 02/17/2010 - 14:30 | Link to Comment Anonymous
Wed, 02/17/2010 - 14:37 | Link to Comment Jesse
Jesse's picture


I would not disregard the effect of the VIX, and the perception of volatility therein.

It went through a steady decline through 2009, and actually hit 18 last month.

That is a drop from 52 to 18 in 12 months, in a fairly steady decline.

The defensive buying of puts was therefore much lower in activity. 


This does not negate the argument presented by the author.

Wed, 02/17/2010 - 14:40 | Link to Comment Anonymous
Wed, 02/17/2010 - 14:50 | Link to Comment the grateful un...
the grateful unemployed's picture

Bernie Schaffer will tell you ( i think) that high put open interest puts a bid under the market. Pre-crash indicators correlate with lows in the STD coinciding with highs in the market. Post crash the lows in the STD are shallow, and the market moves higher anyway, which tends to function as aversion therapy. The recent STD low is one more rather timid probe of the overbought condition, but nothing bullish about it, should it remain the bears have a clear field to run.

Wed, 02/17/2010 - 16:05 | Link to Comment omi
omi's picture

Am I the 1st to note that making a suggestion that long-term change has occured based on 3 years worth of data is ridiculous?

Thu, 02/18/2010 - 02:34 | Link to Comment Rick64
Rick64's picture

Yes I thought the same, thats too short a span and would be curious what it is for 10-15 yrs.

Wed, 02/17/2010 - 16:08 | Link to Comment Anonymous
Wed, 02/17/2010 - 18:27 | Link to Comment BaseLine
BaseLine's picture

Currently reading:

Wed, 02/17/2010 - 19:19 | Link to Comment Anonymous
Wed, 02/17/2010 - 19:44 | Link to Comment Anonymous
Wed, 02/17/2010 - 21:24 | Link to Comment Anonymous
Wed, 02/17/2010 - 23:42 | Link to Comment Grand Supercycle
Grand Supercycle's picture


The impending dollar rally that I warned about from mid 2009 onwards has only just started.

USD Index daily and weekly charts remain bullish.

Vice versa for the EURO and DOW/SP00.

Mon, 04/19/2010 - 08:39 | Link to Comment Tom123456
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