The S&P 500 closed at a record Tuesday, while the CBOE Vix, a measure of market volatility, fell to 16, down from elevated levels in January.But Randy Frederick, managing director at the Schwab Center for Financial Research, says two measures in the options market are flashing warning signs to investors.
One of those marks is tied to the level of open interest for put options and call options on stocks. There were 95 puts outstanding for every 100 calls outstanding. The long-term average for that ratio is 0.82, and it has never fallen below 0.50 since data was first collected in 2001. Since the beginning of 2010, that ratio has been around 0.89 and usually doesn’t change much each day. But it rose to 0.95 on Feb 12 and has stayed there since.
The high ratio indicates uncertainty, bearishness or hedging activity among equity option traders.
The other worrisome indicator is implied volatility of Vix call options relative to Vix put options. That ratio has been spiking up lately and on Friday reached the highest level since Dec 5, according to Frederick.
Vix call options are a lot more expensive at the moment, which means investors are betting that volatility will rise in the near future.
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