Friday, September 19, 2008

Puts Instead of Shorts?

The table below shows call and put activity at the International Securities Exchange (ISE) during the first two hours of today’s trading. Keep in mind that the ISEE is a “call to put” ratio, not the “put to call” ratio reported by the CBOE.

As reflected in the table, right out of the gate there was a flood of calls for indices, ETFs, and individual stocks. Note that in the last hour or so, the activity has tilted heavily toward the put end of the spectrum, as the call to put ratios have dropped dramatically. It is difficult to differentiate between hedging and speculation in these transactions, but now that options spreads seem to be tightening and implied volatility is dropping sharply, I suspect those looking to get short financials and any other part of the market may be leaning toward puts.

It will be interesting to see how the options market is affected by the new shorting regulations.

[source: International Securities Exchange]


Anonymous said...

from comment at Yves Smith blog:

as of 1159 pm today option market makers are not permitted to short.

period end of story.

no short, no put options.

or the put options are available only by matching naturals.

and if they go up huge in price, that means the call options must go up in price by parity (arbitrage will guarantee that they do).

and black scholes cannot price this because it assumes continuously trading liquid and complete markets

so for the time being there will be no options market in these stocks.

anyone who doesnt understand what i just wrote is not qualified to trade options, seriously, and i say this for your own protection.

September 19, 2008 12:12 PM

Niraj said...

Hi Bill,

Thanks for the ISEE link. Its a great resource to look at the market sentiment. If one tracks the history of these number, one could notice that the market has always rallied when the ratio hit anything below 80 and has reversed to the downside when it has above 160 or 180. So does todays ratios mean we are going to see another rally or people are just getting ready for another downfall?


Bill Luby said...

Hi Niraj,

I lean fairly heavily on the ISEE to help gauge market sentiment and have an approach that is similar to yours.

The problem I have with the current numbers (and presumably the numbers going forward) is that these have been generated during a once in a lifetime (presumably) market environment, with new rules and new government initiatives/intervention thrust upon the market right at the end of the options expiration cycle.

So...the short answer is I am not sure, because I am not yet comfortable with an interpretation of the P/C numbers in this new environment. Even then, options expiration makes today's data a unique event and statistical outlier.

Just look at the comment above yours if you have any doubts about this.

Right now I am taking a wait and see approach.

Cheers and good trading,


Jeff Pietsch CFA, Esq said...

Cost of puts undoubtedly just went higher.

Anonymous said...

Notice we are way up on the indicies but $VIX (although it can down alot from yesterday 40s) is still fairly high and not much lower then yesterday closing price of 33.1 (we are around 31.91 right now). So I wonder is because of this "no short sell" is effecting the option premium?

Bill Luby said...


I think the new short selling rules account for part of the explanation, but I'm not sure how much of the full picture is influenced by other factors.

There is obviously a large amount of uncertainty out there at the moment -- and that uncertainty over how some critical issues will be resolved is keeping the VIX elevated.

It will take more than one trading day for the markets to sort out all of the recent (and forthcoming) developments, so for that reason, I don't expect the VIX to jump back down under 20 (like it was just 3 weeks ago) soon.



Anonymous said...


Why every body focus on the vix Index ... just look at the futures he is at a normal price no ?

punky .

Anonymous said...

Hi Bill,

If the VIX index = 33, but the forward month VIX futures = 26, which way is this likely to converge this month? will the futures steadily increase to meet the index at 33, the index moves down toward 26, or they meet somewhere in the middle?

Of course keeping everything constant in the market...


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