Dueling Put/Call Ratios Confuse Traders

Divergence? You want divergence? Take a look at the difference between index option trading and equity options trading.

In much the same way cyclical and growth stocks have pulled in different directions, trading in equity options has been centered on calls even as index options began leaning more heavily than usual toward puts. Traditionally, index options are used more frequently to hedge and options on individual equities are used primarily for speculation.

Volatility Index
Today	% Change
25.44	-1.97
Source: ILX

Schaeffer's Investment Research reported earlier this week that the 10-day moving S&P 100 index put/call average was at 1.86, the highest its been during the 1990s. Today, that trend continued and even picked up steam as traders seeking hedges and protection snapped up puts. The index equity put/call ratio shot to 2.33, showing 233 puts bought for every 100 calls. Trading in the S&P 100 options accounts for about 15% of the total Chicago Board Options Exchange volume and is the most active index options contract.

"The minuscule total OEX call volume taking place cannot be seen as anything other than overwhelmingly pessimistic," the Schaeffer report said. "To a contrarian, there can be no better security blanket." Contrarians hold the belief that excessive put activity bodes well for the market because it suggests an appropriate amount of pessimism.

On the flip side of that action, trading in the names has been usually strong in call activity. "There's been a lot of call-buying. This market is putting in a serious peak," said Jay Shartsis, the head of options at R.F. Lafferty.

Put/Call Ratio
Today (Noon)	Previous Close
0.33	0.37
Source: ILX

The put/call ratio has been in the mid-30s, showing calls trading in a disproportionate amount to puts. That kind of trading makes contrarians worry. It has Shartsis concerned as well. "Taken alone, the index put/call ratio is wildly bullish, but you can't ignore the equity put/call ratio," he said. "It's less subject to hedging."

Call-buying has been heavy in names such as AOL (AOL), IBM (IBM) and other traditional favorites. Put buyers have stayed away from these names because they've put in such strong performances of late. Even the stumble in the Internet sector hasn't attracted too much put-buying because the premiums on those options has been so high.

Shartsis said he was buying puts. "There's good reason to," he said. "This divergence we're seeing in the market is not so good."

---

Call buyers who yesterday chased Antec (ANTC), a fiber-optic cable equipment company, may yet be rewarded as the stock put in a second consecutive strong session.

Antec jumped 1 1/4 to 27 1/8 today, but the implied volatility of the June 25 calls got so high on Thursdsay that the price bump hadn't seeped into the options this morning. The June 25 calls traded about 500 contracts yesterday and closed up 3 9/16 ($356.25) to 4 1/2 ($450). Today, that contract had yet to trade but the bid/ask spread on it was 5-5 3/8.

Volpe Brown Whelan began coverage of Antec today with a buy rating.

>To order reprints of this article, click here: Reprints