CBOE OEX - EQUITY PUT/CALL RATIO SPREAD

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APPLICABLE TIME FRAME(S):  

INTERMEDIATE

UPDATE SCHEDULE:

Each weekday night by 7:00 PM EST

EXPLANATION:

Per the OEX put/call description and the equity put/call description, we know that OEX options traders are often correct at timing market highs and lows while equity options traders are not.  In fact, equity options traders are quite bad at the extremes. 

This indicator is simply the difference between a 10-day moving average of the OEX put/call ratio and a 10-day moving average of the equity put/call ratio.

GUIDELINES:

Since a high OEX p/c ratio is normally bearish for the market, and a low equity p/c ratio is bearish, then the logical interpretation of this indicator is that a high reading is bearish while a low reading is bullish.  In order to get a low reading in this indicator, we would have to see a low OEX put/call ratio (bullish) and a high equity put/call ratio (also bullish).  On the chart, the green and red bands are 1 and 2 standard deviations from the recent mean.

The chart below shows three occurrences of the p/c spread leading to tradable market moves, as the interaction between the OEX and equity put/call ratios highlighted the differences in sentiment between sophisticated (OEX) and unsophisticated (equity) options traders.

Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS finds a low when the put/call spread violates its lower levels, or peaks immediately after the ratio exceeds .88.  It is a guideline and not a trading system unto itself.

STATS:

*Standard Deviation.  See below for a description of standard deviation for the daily put/call reading...

68% of readings (1 standard deviation) should be between .32 and .88

95% of readings (2 standard deviations) should be between .04 and 1.16

99% of readings (3 standard deviations) should be between -.24 and 1.44

In other words, we should expect a reading under .04 or over 1.16 approximately 13 times per year.  Since such a reading would be highly unusual, it suggests that we are seeing an unsustainable trend.  These figures assume a normal distribution curve.

ADDITIONAL RESOURCES:

Chicago Board Options Exchange (www.cboe.com)

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