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Sometimes volatility has a directional bias.

Years ago when I was just starting out in the business I worked as part of a proprietary equity derivative group at a midsized investment bank. One of the market sentiment indicators that some of the old timers in the group followed were the difference between the put/call ratios for options individual equities and Indices. The theory was that Index options were primarily used as hedging instruments by large institutions while individual equity options better reflected the hedging and speculation of smaller investors –thus any divergence between the two ratios, particularly on a day with a major directional market move, was seen as a divergence in sentiment between big investors and the rest of us. During yesterday’s rally the put/call ratio for all index options cleared by the OCC exceeded the same ratio for individual equities by 83%. That is the only time that put buyers in the index market have outpaced put buyers in the single stock market by more than 60% on a day in which the S&P was up over 1% so far this year. Obviously the put/call ratios are currently skewed by the net-short ban on financial stocks but it’s still interesting to note that in the face of a 4.3% rally in the S&P 500 the put/call ratio for indices was so heavily skewed negative.

Andrew Barber