Equity options put/call ratio hits 18-month high

NEW YORK Thu Jun 9, 2011 1:29pm EDT

NEW YORK (Reuters) - The daily volume put/call ratio for equity options on the Chicago Board Options Exchange (CBOE) hit an 18-month high on Wednesday, indicating that investors are significantly bearish on the stock market.

At 0.99, which is equivalent to 99 puts traded for every 100 calls, the ratio is the highest single day close since Jan 15, 2009, the CBOE website showed on Thursday.

The ratio was near 0.55 on average earlier this year before spiking above 0.70 since mid-May.

In general, the put/call ratio moves inversely to the performance of equities. When investors are bearish and speculation in puts gets excessive, the ratio will be high.

"The fact that it's not even near (options) expiration and we are getting this kind of sudden move is pretty significant," said Randy Frederick, director of trading and derivatives at the Schwab Center for Financial Research at Austin Texas.

"I have been expecting a real soft patch in the market from the beginning of May until at least July, and if you look back at what the market did in late January and in February of 2009, this might be signaling more downside. He added that he has been suggesting his clients to roll their positions out until August.

U.S. stocks extended losses for the sixth straight day on Wednesday on worries a slowing economy could deepen the market's retreat. Wall Street bounced back on Thursday, with major indexes rising 1 percent, but the mood remained fragile.

Most equity options volume is traded by retail investors who bet on the upward or downward direction of the market, while index options are used more by institutions for hedges and other investment strategies.

"Individual investors continue to abandon the market at a rapid clip," said Jason Goepfert, president of sentimenTrader.com in a report.

"The latest evidence comes from the American Association of Individual Investors (AAII), whose survey shows only 24 percent of respondents expecting a higher stock market over the next six months," he said.


Some analysts view the high put/call ratio as being a good opportunity to buy stocks.

"A lot of fear came into the market as investors bought puts," said Jay Shartsis, director of options trading at R.F. Lafferty & Co in New York.

"(But) The high ratio identifies a good buy level for stocks. When a ratio turns this high, from a contrarian view, the risk reward factor is now significantly skewed to the buyside," said Jay Shartsis, director of options trading at R.F. Lafferty & Co in New York.

The Dow .DJI, which on May 2nd gained 10.6 percent for the year when it hit its 2011 closing high, is now up just 5.1 percent.

The S&P 500 .SPX, which had climbed as much as 8.2 percent for the year on the same day, is now up just 2.7 percent. And the Nasdaq .IXIC, which rose 8 percent for the year on May 2nd, is now up only 1.5 percent.

(Additional reporting by Doris Frankel in Chicago, Editing by Chizu Nomiyama and Andrew Hay)

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