The volume was relatively constant from 2010 to 2018
The stock market continues to chug as the SPDR S&P 500 ETF (SPY) hit an all-time high for the 21st time this year. This week I broken down the Buy-to-Open Put / Call Ratio (BTO) for the SPY. The data comes from three different exchanges (CBOE, PHLX and ISE) and only takes into account the option volume initiated by buyers.
The following graph shows the SPY since 2010 together with the 20-day BTO put / call ratio for SPY options. The ratio is almost always above one, which means that more puts are bought to open than calls. This is because buying SPY puts is a popular way to hedge stock portfolios. The rate has generally been falling since 2010 and recently hit its lowest level since the end of 2018. Unlike now, however, this was during a severe market decline.
Breakdown of the buy-to-open volume
The volume was relatively constant from 2010 to 2018. Since then, the volume has increased at several peaks. The spikes have mainly occurred during market declines. However, the increase in volume is now as stocks hit all-time highs, which I find interesting. As the volume increases for both calls and puts, the put volume is significantly lower than the level reached during the past peaks while the calls are near the peaks of those past peaks. While I generally view the put buy as a hedge, I view the call purchase as more speculative, so I would conclude that speculation in the stock markets is gradually increasing.
I was curious about the impact of these volume spikes as the market neared an all-time high. The following table shows these cases since 2009 (as far as we have the BTO data). For those who are curious, I define a volume spike as if the 20 day BTO volume is 20% higher than last year’s average volume. The lines in bold below interest me most. These are the only three times the 20-day BTO put / call ratio is below 1.50. In other words, these are the times when the call volume was most prevalent during the volume spike and the SPY was close to an all-time high. They are the only cases that resulted in negative three-month returns. It’s also the only negative return a year later. This supports the theory that an increase in call volume relative to put volume while stocks hit all-time highs is a warning sign.
The table below summarizes the returns in the table above and compares them to typical SPY returns since 2013. Returns look bullish in the short term and bearish in the longer term (the average return after six and twelve months is lower than normal). The general returns are less interesting to me than the specific returns mentioned above, where call volumes are high relative to put volumes.
Finally, here is a table of the SPY with markings for the signals above. The red marks are those where the 20-day BTO put / call ratio was below 1.50. These two happened just before a small retreat in the first half of 2018.