Normally we look at bullish option flow on individual names as a good starting point for a long position, on the assumption that the buyer has done their homework and the probability of a profit is better than that implied by the options prices. Bearish flow is the opposite, with the understanding that some put buyers are simply hedging long stock positions, meaning there are more 'false alarms' among put buyers than calls.
Yesterday was interesting because the market shot up more than 1% and call activity was very strong compared to puts. In fact, while put volume was 20% light on the day, call volume was near 100%, working out to a put:call of 0.5 versus 0.6 for the recent month.
On one bullish/bearish table I compiled at the end of day we actually ran 'short' of bearish names, an unusual occurrence and one that I take as a warning sign for 'frothy' action.
Futures are currently down 21 points, but I assure you this is not Monday morning quarterbacking. One desk note I saw today suggested that market moves are getting more extreme both up and down due to traders who are lack conviction 'chasing' moves and I have to agree. After unusually strong returns in 2013 for the broad market, 2014 is a different beast and investors and traders are trying to find their footing.
Bullish flow can still be a good sign, but I'm likely to assemble trades in the form of an outperformance bet rather than outright long for a while. SPDR S&P 500 (SPY) and PowerShares QQQ (QQQ) and the sector ETFs make this an easy task.
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Henry can be followed on Twitter at twitter.com/OptionAlert
EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas