Equity call ratios diverge as protection weighs-analyst

(Adds dropped word “October” in para 11)

* Put-call ratios mixed, standard equity sends sell signal

* Put buying for protection distorts standard equity ratio

* Equity weighted put-call ratio viewed as more accurate

By Doris Frankel

CHICAGO, Oct 29 (BestGrowthStock) – A large difference has
developed between two major equity put-to-call ratios, showing
investors increasingly buying puts to protect positions but
spending less for them, according to a report on Friday.

McMillan Analysis Corp said one ratio was pessimistic on
market conditions while the other suggested things were looking
up.

The standard 21-day equity only put-to-call ratio is
sending a bearish signal, but a weighted-dollar ratio remains
bullish, according to Larry McMillan, president of the New
Jersey-based options research firm in the report.

McMillan views the bearish equity weighted ratio as the
better one to follow as the amount of put buying for protection
has distorted the standard ratio’s bearish signal.

Both ratios gave bullish signals at the start of September.
But the standard ratio rolled over and began to rise near the
start of October while the weighted dollar ratio has continued
to decline throughout October, the report said.

Typically the two ratios move together but lately they are
not because inexpensive out-of-the money options are being
bought for protection, thus not generating much dollar volume.

“Therefore, we’d rely more heavily on the weighted ratio as
the mechanism for a broad market prognostication,” he said.

A standard put-to-call ratio is computed by daily put
volume divided by call volume while the dollar-weighted ratio
calculates how much money flow is spent on the puts versus the
amount of calls on a daily basis.

The dollar-weighted volume equals the closing price for
every option each day times the days’ volume. The ratio
calculates the dollar-weighted puts divided by the
dollar-weighted calls.

“My hypothesis is that there has been a tremendous amount
of out-of-the-money put buying in the last month or so,”
McMillan said.

Traders were fearful during October and options got cheaper
and cheaper as the broad market rallied and implied
volatilities continued to drop, he said.

Investors who worry about a slide in stock prices can
protect themselves by buying defensive puts, which give them
the right to sell a stock at a fixed price any time until
expiration. A call conveys the right to buy the security.

“Heavy out-of-the-money put buying would make the standard
ratio rise because of the heavy volume,” he said. “But it might
not necessarily have a great effect on the weighted ratio,
especially if the puts are rather low-priced,’ he said.

Data shows that both put volume and call volume have been
increasing in the last 21 days. Put volume is up 20 percent,
while call volume rose only 13 percent. That is why the
equity-only put-to-call ratio has been rising.

In contrast, weighted call volume has been increasing, but
weighted put volume has been decreasing, thus the ratio has
declined and is considered bullish.

In addition to these two, which are the most trusted broad
market put-call ratios, some broad-based index ratios are used
for additional verification of broad market projections.

These also shows a divergence. The S&P 500 weighted futures
ratio is on a recent sell signal; the Standard & Poor’s 100
index (.OEX: ) weighted ratio remains a buy and the tech-heavy
QQQQ weighted ratio has flashed a sell signal, McMillan said.

(Reporting by Doris Frankel; Editing by Andrew Hay)

Equity call ratios diverge as protection weighs-analyst