Part 3: Index Option Volumes
Option World: Specific statistics and details for each individual contract month
Legend:
The CBOE put/call ratio represents the CBOE exchange's total put volume divided by the CBOE's total call volume. However, this widely reported value may not reflect the nuance of a particular index. So we have probed into the CBOE's data and determined each individual index option's put/call ratio. Below are the put/call ratios of the CBOE's top 5 most active indices.
Below are the composite put/call ratios. We use the term composite to mean the sum of all puts and calls traded in all actively traded contract months. This produces one aggregate put/call ratio for each index option. In addition, each individual index option trades many different contract months simultaneously and each contract month can have its own put/call ratio. For a detail of each contract month ratios, visit our Option World.
Part 3
In part one, the index option composite put/call ratio and the CBOE exchange's daily put/call ratio was explained and illustrated. In part 2, the option values are used to create put/call ratios and are added to the charts. In part 3 the actual volumes are plotted.
Sometimes a ratio doesn't provide enough information. While the put./call ratio tells us which option type had more volume, you still don't know the level of activity. By looking at the actual volume traded you can see if the activity was light or heavy. This can be important when new daily closing index highs and lows are being made.
In the SPX option market you can see that the overall activity in puts is increasing but the level of interest in calls is generally the same except for one day. This spike in call volume occurred on Sep. 18 2003, the day before option expiration. As for the XAU option market, interest in both puts and calls is growing as the index is rising.
Also look at the difference between the put volume and the call volume. In some markets, there is a consistent difference while in others there isn't. This difference represents the sentiment of the participants. In the SPX option market, there is more put volume consistently while in the XAU market there is slightly more call volume.
If we focus on the puts in the SPX market, these options are being trader for either of two reasons. One, they expect lower prices, or two, they are insuring themselves from losing their profits. This is why explaining option data is so difficult. The data doesn't tell us how many option traders are buying puts expecting to sell them at lower prices versus how many option traders are willing to spend a little money on insurance and protect their captial gains. Calls on the other hand represent a slightly different bias. Ask yourself why buy a call? Well, the first reason is to use leverage. This often used term simply means that you can use your money more efficiently. Instead of buying each of the companies in the SP500 and spending $500,000 or more, you could buy one SPX option contract and use only several thousand dollars to accomplish the goal. So you leveraged your money. For example, $5,000 now controls $500,000 worth of stock which acts like a lever having a ratio of 100:1. You can claim the profit and loss without owning the stock. However, today there are ETF's such as the SPY (commonly referred to as the SPYDER) which enable smaller investors to own the SP500 directly. No longer do you need to use options or buy a mutual fund. You can buy and sell the SP500 as a stock buy purchasing the SPY. But what else would cause someone to buy an SPX call option besides leverage? There is no insurance value in this instance unless the trader was short the SP500 stock. So if a trader was insuring his/her short position from going against them, then they would buy a call option to offset losses from higher prices, or hedge their short position. Since shorting represents a small portion of all stock trading, this reason for buying calls is also low. So if we were to make a general statement, call volume doesn't represent the same proportion of forces as put volume does. Call volume is primarily leveraged trading. However there is an reason to buy a call option. If a large institutional investor wants to get into a market it can first step into it with options. It can protect itself from losing a potential profit by first buying the option and then buying the underlying security or index. This way if their order is so big that is artificially drives prices higher it can lock in those lower prices before they enter the market and guarantee their entry price. Then when the order is filled the option is sold and whatever was lost in the purchasing of the underlying security, the option recovered the slide in prices as the order was executed. The profit from the option offsets the loss due to order execution.
This is why the volumes are expressed as the put/call ratio. Puts generally outnumber calls because professionals have more use for them and so the ratio is expressed with the greater quantity in the numerator. It is rare for call options to outnumber put options and so this is a significant event when investors are willing to leverage their money. It is almost an announcement that this is a "sure thing" and they want to maximize their winnings. Remember that it is riskier to use options but that options also use less money.
As an example, look at the XAU volumes. When the call volume spiked above the put volume, the subsequent 10 days saw either stagnant prices or declining prices in the XAU. So much for a sure thing. XAU prices did ultimatly move higher, but not when the call volume spiked. In the SPX market there are only two call volume spikes, and prices dropped the next day. Look at all of the call volume spikes and make your own conclusions.
created 9/19/03, ©2003 The Small Investors Software Co. All rights reserved.