Put-call index surges

October 10, 2014 08:31 AM

Far be it from me to call an end to the recent spate of market weakness, but I do want to point out the surge in relative demand for protective put options in Friday’s trading.

The S&P 500 (CME:SPZ14) Index has rebounded mid-morning from what now stacks up to be a 5.4% correction from the record peak, as investors chew on a smorgasbord of geopolitical concerns.

The trouble currently facing investors is what the next catalyst for continuation of the rally is. And whether you list slow global growth, confusion over how to do “whatever it takes” by Draghi and company at the ECB, an end to QE at the Fed, the onset of rising interest rates, east-west sanctions countering stimulus efforts or fears over Ebola – we could go on –you perhaps get the point.

The U.S. economy is the only thing pulling the global economy forward. Investors might be forgiven for observing that following an almighty stock market rally what’s left? Indeed it is a perfect storm for equities. Take a look at the composite reading of the put-call ratio, which just matched peak levels consistent with strong selling pressure for equities.

The green line is mapped on top of the S&P 500 index, while the lower panel displays the Vix index. Put-call values above 1.0 indicate dominant demand for put options, while readings below that convey stronger demand for call options. The ratio reached 1.19 earlier on Friday as investors considered the lack of positive catalysts and weigh them against a laundry lists of negatives.  


Chart shows Composite put-call typifies peak in volatility

About the Author

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.