Option Buyer Sentiment Indicators

January 19th, 2010

Optimism is running high and most analysts expect a full recovery. Listen any business news station (CNBC, FOX, Bloomberg, etc.) and you’ll see that 90% of their guests are bullish. Over 80% of all newsletter writers are also bullish. Last week call purchases were extremely high, hitting levels we haven’t seen in many months. The VIX is at the same level it was in September 2007 and fear has been replaced by greed. Low option implied volatilities mean that speculators are not buying puts and institutions are not buying them to hedge. These conditions can persist for a period of time, but they turn quickly.

The Option Buyer Sentiment Chart is it’s traditional measure of option sentiment shows the CBOE put call ratio is continuing to fall as traders ignore the need to buy downside insurance. Basically in English for those who don’t speak chart – it means traders are not worrying about the downside when the they should be. The 14 day moving average of the CBOE equity only put call ratio has risen once again above the bullish extreme and is one of the highest readings seen in years. Again the signs are all around us that this is turning out to be the exact time to exit this bear market rally.

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