Sunday, June 07, 2009

June 9th: The Put to Call data and how well it predicts the market

I have been reporting the Put to Call ratio data almost daily looking for clues as to market direction. This past weekend I looked at this data in a whole new light. I found some interesting new slants on the data I wanted to share with my readers. First a little history of what I have reported and what it has been included in the data. I also have included several charts which I will explain later.

The Put to Call ratio which I have reported faithfully in my posts for the past year or so has several components within it. Let me explain. It includes all the Equity Options Calls and Puts in a given timeframe, usually a day. It also included all the Index Option Calls and Puts for the same timeframe. And while avery small number,usually less than 50 in a day, it also includes all the Interest Rate Options of Puts and Calls, in the same timeframe, usually a day. The Total Put to Call ratio is calculated by adding all the number of Calls in these sources of data and all the Puts in these sources and dividing the Total number of Puts by the Total number of Calls. The resulting number is the Put to Call ratio. This weekend I went behind the numbers to see if one group of Options were a better indicator of information than the others in predicting market reversals. Here's what I found.

The chart above shows the Dow Industrial daily close from January 1, 2008 to Friday's close June 5th, 2009. I have selected 3 major times when the market had a significant move. I then looked at charts I made of a number of variables all for the same time period of Jan 2008 to Friday's close, which I have identified below:

-Total number of Equity Calls
-Total number of Equity Puts
-Total number of Equity Calls and Puts
-Equity only Put to Call ratio
-Total number of Index Calls
-Total number of Index Puts
-Total number of Index Calls and Puts
-Index only Put to Call ratio
-Total number of Equity and Index Calls
-Total number of Equity and Index Puts
-Total Put to Call ratio

The other charts following the Dow chart above show the best 2 indicators of market changes corresponding to a market move. One is the Total Put to Call ratio, which includes Equity and Index data combined. The other chart which showed an anomaly was plotting the number of Equity Calls. It shows a surge in Equity Option Calls reaching the highest it has been these past 5-6 months. The data had me wondering why is it where the volume has been relatively low the past 2 months we have so many Calls being bought. Then I thought because it was cheaper to buy the Option than to hold the underlying stocks. Options have a defined timeframe before the expire. Stocks can be held indefinitely but you must spend more money to own them. Many have less money than they had and Options are a leveraged way to make money when you have less available. I am very open to other's views on the reason for this. But as you can see from the chart there has been a surge of late. If you would like a copy of all the charts send me an email and I will send them to you. The charts are in JPEG format so they should be easy to open and view. Also tell me a little about yourself and your interest. I am just a curious person and basically an engineer at heart so I am always manipulating data. :) So in summary, looking at the overall Put to call ratio of the combined Equity and Index Options seems to correlate the best to market moves, reaffirming the use of the indicator.

This week, the indicators we will get info from are listed below:

Bloomberg Survey expectations for this coming week:

Release Period Prior Median
Indicator Date Value Forecast
Whlsale Inv. MOM% 6/9 April -1.6% -1.1%
Trade Balance $ Blns 6/10 April -27.6 -29.0
Federal Budget $ Blns 6/10 May -165.9 -181.0
Initial Claims ,000’s 6/11 6-Jun 621 615
Cont. Claims ,000’s 6/11 30-May 6735 6770
Retail Sales MOM% 6/11 May -0.4% 0.5%
Retail ex-autos MOM% 6/11 May -0.5% 0.2%
Business Inv. MOM% 6/11 April -1.0% -1.0%
Import Prices MOM% 6/12 May 1.6% 1.4%
Import Prices YOY% 6/12 May -16.3% -17.4%
U of Mich Conf. Index 6/12 June P 68.7 69.5

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