Are Options Traders Running For The Hills?

Via Dana Lyons' Tumblr,

Fear finally made its way into the equity options market at the end of last week – at least for a day.

After months of (well-documented) investor complacency, recent stock turbulence has begun to introduce some fear back into the market. It has been manifested in the volatility market, as we covered extensively in our Vexing Vix miniseries last week. And after last Thursday’s sharp selloff, fear has now also crept into the options market – at least for a day.

We base this on last Thursday’s reading of the CBOE Equity Put/Call Ratio. Of course, when the ratio is elevated, it is indicative of relatively heavy put volume – and a possible sign of an elevated level of fear on the part of traders. Last Thursday, the reading came in at 0.95. This was just 1 of 3 readings that high over the last 12 months. The other 2 dates happened to be within a day or 2 of the market lows during the Brexit episode and the U.S. Presidential election.

So now that options traders have seemingly headed for the hills, is the coast clear for stock investors? Inasmuch as the coast is ever really “clear” in the markets, we may have to caution investors about getting too giddy based on this data point. For, as we also demonstrated in the the case of the VIX last week, the circumstances surrounding last Thursday’s reading aren’t exactly textbook conditions of a market low.

Specifically, while most readings above 0.94 in the CBOE Equity Put/Call Ratio since the onset of the Bull Market in 2009 have come following a gradual buildup of fear, this was more or less a one-off. As evidence, of the 54 daily readings over 0.94 in the past 10 years, this is just the 5th occurring while the 10-day average of the ratio was less than 0.70. Now, that does not mean that last Thursday’s reading was not a meaningful show of investor fear (witness yesterday’s subsequent big bounce). However, it may make it less likely that a durable bottom is in place, than had it occurred into an already more fearful environment.

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