Diversification in options trading

Bond yields have led traders to bet more on the NDX, SPX

As the harrowing date of the pandemic anniversary has come and gone, bond yield fears continued to grapple Wall Street. Even after last week’s Fed meeting, at which Fed chairman Jerome Powell reinforced the central bank’s cautious policy for at least two years, ten-year government bond yields rose 11 basis points to 1.75% a day later, the highest since January 2020.

The push-and-pull in bond yields last month has caused some degree of slowdown in technology, alternative energy, and other growth success stories. Here at Schaeffer, one of the unique sentiment indicators we track is the 10-day buy-to-open put / call volume ratio determined by our quantitative analysis team using data from the International Securities Exchange (ISE), Chicago, Board Options Exchange (CBOE) and NASDAQ OMX PHLX (PHLX) were put together. This metric reflects the number of puts bought relative to calls on the three major options exchanges over a trading period of approximately two weeks.

By limiting the focus to equity options, we are eliminating a fair amount of hedging activity, which is often focused on indices and exchange-traded products. This results in a truer sentiment reading where a tendency to put can generally be considered “bearish”. “and a preference for calling” bullish. “By focusing on a 10-day period, we can also look at recent option buying activity without being bogged down by the” rushing “of data for a day. Given the short Interest rate data, which is delayed every two weeks, we think this is a good indicator of real-time sentiment to measure how traders are playing the stock market.

However, given the “pandemic,” it felt right to look back and see what these ratios tell us now, compared to what they told us on March 18, 2020 when they were Cboe Volatility Index (VIX) offset to 85.47. For the S&P 500 Index (SPX)The 10-day buy-to-open put / call volume ratio for stocks only was 0.77. It closed at 0.42 a.m. on Thursday and rebounded after testing new lows near 0.30. For the Nasdaq-100 Index (NDX)it stood at 0.76. Now, like the SPX rate, it is rebounding from its lows at 0.51 and moving higher towards its early November high, which coincides with the 2020 US presidential election.



This is where things get interesting. For the VIX, the 10-day put / call volume ratio for stocks only was 1.04 on March 19, 2020, one day after it peaked. Now it’s 0.70. The “fear display” marked a new annual low of 18.95 on Thursday, a long way from these forays into the time 80, 12 months ago. However, consider the P / E values ​​for the VIX in late October and early November. They were clearly much quicker to respond to elections than the pandemic or bond-yield drama we are in right now.

COTW VIX diagram

The context provided here is not intended to add to the bond yield panic we are currently battling against the 2020 coronavirus pandemic outbreak. Instead, it should remind that speculators are increasingly negative – and bearish option bets are stacked accordingly – the net effect will be a headwind for stocks that could hinder recovery attempts. Instead, it makes sense to wait for the ratio to rollover, suggesting that option players are stepping back from climatic pessimism and that pressure on stocks is easing.

Bernie Schaeffer’s subscribers Chart of the week received this comment on Sunday March 21st.


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