August 19, 2017

Historic Extremes in Several Options Indicators

Yes, I am still sticking with a short to intermediate-term move to the downside over the next few weeks to months. I will not repeat my  post from yesterday (Click Here), but I will say that the decline, if and when it happens, should move back down to the gap from 3/5. The probability of the move has increased further given the recent historic extreme in the ISE Equity Put-Call Ratio.

The reading has pushed to 276 at yesterday’s close which makes it only the fourth such reading to move above the notable 275 mark. This means that traders purchased nearly three times more call options than put options.

It has been a month and a half since the S&P has lost more than 1% so it makes since that call buyers have become more and more speculative as time has passed.

There have been four other times when the ISE Equity Put-Call Ration has pushed above 275 and each time the S&P has declined dramatically over hte next two weeks.

6-15-07 – S&P lost -1.9%

7-12-07 – S&P lost -4.0%

10-8-07 – S&P lost -3.2%

10-28-07 – S&P lost – 6.6%

As you can see it does not look too promising over he next two weeks for the major indices given the aforementioned. Couple this with a ‘very overbought’ market and short-term seasonal bearishness and Mr. Probability quickly swings towards the bearish camp.

Of course, as we all know there are no certainties in trading. However, as a trader, I thrive when the probability leans so far in one direction and now is one of those times. Again, there are no certainties, but probabilities are all we have as traders, right?

I hope all of you have a wonderful night and a great morning!