Just Say Nyet

• Posted by Adam Warner
• on April 13th, 2010

So the put skew has risen in SPX. You know who else liked SPX puts? Stalin.

But really, I have possibly given the impression I’m whistling past the selloff by mocking recent option-y postings with bearish conclusions. Like last week we learned of the sinking put/call call, and now we hear of pricy puts.Which incidently sort of proves my point that both aversion to puts and desire to own puts are interpretted bearishly. But I digress, so let’s clarify.

I don’t discount the bearish case. I just don’t see why there’s such urge to be THE one that calls the turn. If you’re a tele-pundit, yes, they’ll bill you as a Seer for all eternity and conveniently forget any less timely or less accurate calls. As a trader/investor though, no, it won’t help you. If you catch it just right, frankly, you should internalize that you in part got lucky. Don’t expect whatever number you noticed that moment to magically work the next go around. And don’t forget other times you may have gone too short too early.

As to these options indicators, the low put/call is indeed bearish. It’s just not unique as a number, or inconsistent with everything else you see on the board. Assuming you see the market grind up slowly every day while the VIX makes new lows. So there’s not enormous value added using the put/call right now, it’s just more confirmation of apathy. And apathy’s a lousy market timing tool.

High price skew towards OTM puts (vs. a mirror OTM call) is bearish on the margins. It’s evidence of The Market not believing the rally and/or getting nervous it will end soon. That’s certainly a reasonable posture to take, particularly if you’re locking in gains. It’s just bullish on a contrary basis, NOT bearish.

As long as we’re on the subject, same thing with the persistent VIX futures premiums. That’s Fear and bullish on the margins.

Again, the rally will end someday and there will be a backdrop of options numbers that will make it look crystal clear in hindsight. But those numbers no doubt caused several early shorts to get blasted first.

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