Fearful Traders Send Put Buying to Lofty Levels

Just three days of weakness with Friday being one of the lowest volume trading days of the year and traders are still shaking in their custom-made boots. Over the last few days we’ve seen a pick up in put buying as fear pours into the market.

Below is a chart of the S&P 500 ($SPX) and the three breakdowns of the put/call ratio. First we have index options, then equity options, and all options. Index put/call and all options put/call are both at extended levels as a surge in buying of puts has pushed the ratios off-balance. This type of data can help give us an idea of market sentiment. As more puts are purchased it typically signals more fear entering the market – sometimes too much fear.

Based on the strength of equity futures this morning, it looks like we are in for a pop – although still plenty of trading to be done. Last week I discussed whether the bout of weakness we were experiencing was a sign of a top or just the markets taking a breather. I put my ballot in the latter, guessing that we would see some continued strength as bulls buy the dip, and that appears to be taking place this morning.

Market participants appear jittery, fearful to have equity exposure but still nervous of missing out on any rally attempts. It’s important to stay focused and not get lost in the minutia. Create a plan and follow it and there’s a good chance you live to fight another day.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.