Option Gauges Spike, Suggesting a Short-Term Low

08/05/2014 8:00 am EST

Focus: OPTIONS

Steve Smith

Reporter (Options Columnist), Minyanville

Steve Smith of Minyanville.com discusses the options gauge spike that occurred last week and what it suggests for options traders about stocks this week.

The main option gauges—the Volatility Index (VIX) and the put/call ratios—spiked sharply last week, suggesting stocks might have put in a short-term low.

The VIX surged some 35% to its highest levels in four months. But a more telling flight for portfolio protection was the surge in the put/call ratio. I recently noted that the low VIX was a merely a reflection of low realized volatility and the fact that futures had maintained a premium suggested there was an expectation for an increase in volatility with an accompanying sell-off—the upshot being that there was not widespread complacency.

Likewise, the put/call ratio, while relatively low for equities, had remained robust on the indices, indicating money managers were maintaining broad market protection.

Last week, a few of the put/call ratios on both the equity-only and index products jumped to yearly highs. The ISEE reading (which is a call/put) dropped from its 20-dma of 200 down to 45, its lowest reading in over a year. 

This type of spike and rush for put protection can act as a safety net and might provide a short-term low and prevent the decline from accelerating too quickly or deeply.

By Steve Smith, Contributor, Minyanville.com

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