Beware the Limits of Implied Volatility

Traders most often use broad market measures like the put/call radio and volatility index (VIX) as gauges of market sentiment -- that is, whether traders are bullish or bearish.

And as measures of emotion, they are most often viewed as contrary indicators. That is, if the masses are extremely bullish, as indicated by these metrics, it could spell trouble and a signal to sell.

Although interpreting data in this light is certainly valid and often useful, there are also situations in which activity in the options pits can accurately predict or presage an impending move in the underlying stock. ...