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Panic Attack

19 Jan 2021 ‚óŹ 02:37 AM

This chart you have seen before but it moves to both sides of the spectrum. I must tell you if you saw this in 2004 the open interest was skewed to the side of Call options, meaning there were always more call options than put options open. I was told that was due to non-participation by Institutions. So when you see huge call buying in US markets in the last 9 months that is typical bull market behavior, I think. 

Now that has changed in the last decade. Suddenly everyone loves selling Puts most of the time. And now Institutions are participating in a big way, including prop funds. So what is rarer is a situation where the Call Open interest exceeds the Put Open Interest. The chart of the last few years shows a red line on when that reaches an extreme and we usually get panic bottoms. now in bear markets and free falls like March 2020, the first reading may not work and it takes time before a reversal. But not so during the bullish trend in markets. The reversals are faster.

So unless we are in a bear market the chart below shows the exact number, on the days we had a big red candle or panic in markets, and all readings above 30k crore ended up being the bottom followed by a rally. So as options sellers became confident that the market would fall and sold more calls instead of puts the market bounced back. Will this happen again today? The reading is there at 36240 crore as of yesterday [Call OI minus Put OI in crore]. The set up is for a bounce back near term.

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