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OEX Option Ratio Hits Another Record

Contrarians like what they see in S&P 100 trading.

Options junkies, take note. Activity in


options on the

Standard & Poor's 100

index this week sounded off a sour note: Key OEX ratios are saying investors think the market won't go higher.

And that, for contrarians, is a bullish sign.

If that sounds like

Alice in Wonderland

, where nothing is as it seems, but everything is as it should be, that's the right take on options indexes, which act as inverse indicators for investor sentiment.

Schaeffer's Investment Research

reported earlier this week that the 10-day moving S&P 100 index put/call average was at 1.91, breaking last week's record of 1.86, the highest level ever this decade. 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. (As noted in Friday's

column, trading in S&P 100 options accounts for about 15% of the total

Chicago Board Options Exchange

volume and is the most active index options contract.)

"Bonds started affecting things early today, starting with the Merrill-related selloff, and that didn't help the stock market," said Bob Rack, vice president with Schaeffer.

Merrill Lynch

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on Tuesday cut the bond component of its model portfolio and raised the cash component. Merrill now recommends investors allocate 40% of their holdings to stocks, 30% in bonds and 30% to cash. The firm had been recommending a mixture of 40% equities, 50% bonds, and 10% cash.

And on Monday, when the Dow broke 11,000, the OEX ratio of puts to calls broke above 2. "That's even more bullish, when pessimists are acting in a counterintuitive way on days when there should be no fear, and the market was hitting new highs," Rack explained. When contrarians see fear, they expect the market to pop.

However, not everyone agrees with the bullish forecast, at least over the next few months, according to a full-time index S&P options trader. "The


is moving again today, and volatility is always smart, so maybe we'll get hit sooner than we think," said Greg Simmons, portfolio manager with

Linear Capital Partners

, a California hedge fund. "They don't call it a summer rally for nothing; someone gets beaten up beforehand."

Among individual options,

Columbia/HCA Healthcare


May 30 calls and May 25 puts were trading more actively than usual, and at least one trader pointed to a "straddle" on Columbia.

May 30 calls on the

American Stock Exchange

traded roughly 425 contracts, compared with open interest of 554. The call price was up 3/16 ($18.75) to 15/16 ($93.75). Its May 25 puts were flat at 1/2 ($50) on volume of 448, compared with open interest of 757.

How'd the trader know it was a straddle? "The implied volatilities on both the May 25 puts and the May 30 calls are both at 58, higher than Columbia's historical volatility of 50. Someone is buying," he added. A straddle is the purchase or sale of an equal number of puts and calls having the same terms.

The facts behind the play may have come Monday, when



said it took a charge to settle two federal investigations of its health-care services and a restructuring.

The Melville, N.Y., company has been buffeted by a federal fraud investigation linked to the inquiry into Columbia, a major hospital chain. In March, Olsten officials said they had reached a $61 million settlement with the

Justice Department

and hoped to put the government probe behind them.

A key element of the Justice probe of Columbia had involved home health care. Olsten managed several home-health agencies for Columbia and among the issues spotlighted was whether Columbia and Olsten had defrauded the