Qqq Options Distortion

[SideshowBob]

I subscribe to Schaeffer's Monday Morning Outlook, and today's included this talk on options. I highly suggest subscribing (it's free) at their site if you can.

 

Two weeks ago, institutional activity on 2005 QQQ LEAPS puts sent several single-day ratio readings over 1.0. If possible, such activity is best left out of any contrarian sentiment reads since it was institutional (sentiment analysis is best applied to smaller groups or individuals), non-directional, and long term in nature (speculative activity favors short holding periods). Last week, the CBOE equity put/call ratio exceeded 1.0 on Monday and Thursday. However, both days saw QQQ put volume well exceed QQQ call volume by 88,000 and 91,000, respectively. Without the influence of QQQ activity, the put/call ratios of 1.10 and 1.05 would have been 0.78 and 0.76. What does this mean? WITH the impact of QQQ option trading, the 21-day moving average of the put/call ratio rallied from a recent low of 0.61 to a reading of 0.77. This figure rivals the peak of 0.79 from last October and is a historical signal of an impending market bottom. WITHOUT the impact of QQQ option trading, the 21-day moving average of the put/call ratio would instead have rallied from a recent low of 0.57 to only 0.62. That would be interpreted as a sign the recent sell-off has a ways to go as the put/call ratio would still be a considerable distance from historic peaks.

 

SB