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Investing  | October 16, 2020

Options activity suggests caution among institutional investors, while individual investors remain very bullish.

The Cboe index put/call ratio hit 2.03 Tuesday, which means there were roughly two puts traded for every call, while the Cboe put/call ratio on individual stocks stood at just 0.39, showing that about 2.5 times the number of calls traded than did puts.

Index options on market gauges like the S&P 500 index tend to be favored by institutions who use puts to hedge the value of entire portfolios while single-stock call options are favored by retail investors as a way to speculate on individual stocks.

Calls give investors the right to buy an index or individual stock, while puts give holders the right to sell them.

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Chris Murphy, co-head of derivatives strategy at Susquehanna Financial Group, wrote in a note on Wednesday that the index put/call ratio Tuesday was in the 99.8th percentile over the past five years, while the individual stock ratio was in 0.2nd percentile over the same span.

The put/call ratio for index options can bounce around from day to day and actually fell back to 1.11 Wednesday. But it has averaged 1.55 so far in October, showing heavier volume of puts than calls.

The individual stock put/call ratio has consistently been below 0.5 so far this month and since June 30, indicating a continued preference among retail investors for calls. The ratio got under 0.4 in late August and that ended up being a contrary indicator as stocks sold off in early September.

“There has been a dramatic divergence between Cboe put/call ratio on the index and equity levels,” Murphy wrote. “Is this a clear example of bullish retail traders ramping up single-stock call buying again while at the same time institutional traders are increasing index put protection? There may be an element of that going on, but in reality there are many more moving parts.”

One factor boosting call volume on individual equities and depressing the put/call ratio is heavy volume in Apple (ticker: AAPL) calls related in part to its iPhone 12 launch earlier this week. Over 2.7 million Apple calls traded Tuesday against less than 1 million puts.

Much of the Apple option activity is by day traders who close out their positions by the end of the trading session. Heavy volume in Apple call options often translates into only small changes in open interest, or contracts outstanding. Apple options have consistently been the most actively traded individual equity contract.

Murphy writes that on the index side there may be less writing of calls by institutions given market strength.


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