Options traders pull back

We've been checking regularly on the behavior of options traders over the past couple of months because their activity had been speculative to a record degree.

Last week, they became a bit less aggressive. The smallest of traders, those buying or selling 10 contracts or fewer at a time, spent 44% of their volume buying call options to open. That's down from over 50% the prior week and is the 2nd-lowest percentage since May.

Because they've been so aggressive for so long, the 10-week average hit a record high and is now curling over.

They hadn't been buying many protective puts as hedges, either, so the ROBO Put/Call Ratio neared its lowest level in 20 years and is also curling on a 10-week moving average basis.

When this ratio dropped below 0.4 and curled higher between 2004-06, stocks went into a holding pattern.

Because they'd been paying so much for call option premiums, and not much for puts, the Put/Call Premium also dropped to a very low level and has since started to move higher. The Backtest Engine shows mixed forward returns after the other times in the past decade when this happened.

Stocks sold off in 2011, 2012, and 2018, but in 2014, the S&P 500 managed to climb for months on end. Most of those gains were eventually given back temporarily during late 2015 - early 2016, but that's little solace to those who sold too early.

The average started to curl up last month, too, and stocks have rebounded strongly since then.

Overall, there was little that happened last week to change the suggestions from the options market - trading behavior still rivals the most speculative periods in 20 years. It has eased back a bit from the height of the mania in late August, but there isn't much here that could be considered a positive for stocks.