One of our customers recently asked a good option-related question regarding premium in index options. This is a fairly common inquiry so I figured my response is worth sharing with everyone. See the question and answer below.
Customer:
Hi Larry,
I see ES call premium is much less than put premium for equal distance strikes. Does this mean market is bearish biased?
We are pleased to announce the release of Option Workbench 2.2. This new version of Option Workbench contains several new features that make finding opportunities even easier and assist you in analyzing your risks before you trade.
The feature article this week lays out three of the seasonal patterns that we trade or observe in October and November. More will follow later in the year, and they will be the subject of another article at that time. The October Seasonal trade won’t be operative this year unless there is a larger pullback than the modest one we had last week.
It's almost that time of year once again for one of our most successful seasonal trades: the Heating Oil – Gasoline futures spread. This trade has had a steller track record over the years and has been followed closely in The Option Strategist Newsletter.
The volatile moves this week have given rise to a number of new trading signals. Since some are in conflict with others, one has to make a choice as to how to approach them.
$SPX sold off sharply and recovered sharply and is now more or less where it was just over a week ago. An $SPX close above 1695 would likely pave the way for another attempt at the all-time highs of 1730, which is also resistance.
...The speed of this market is being accurately reflected in our indicators, I believe. What seemed to be an extremely bearish environment just a couple of days ago, now appears ready to reverse to buy signals in at least some areas. Since the equity-only put-call ratios remain on sell signals, it does not appear that an overall “all clear” will be sounded, but there is upside potential in these short-term buy signals – should they be confirmed...
Of course, the title of this article is also the title of a song that refers to the Christmas Holiday season. Although, I prefer the Staples commercials in which the parents are dancing around while singing the song as the children return to school in September.
The broad market is rather schizophrenic right now. On Friday, the prevailing attitude seemed to be “I better buy now before Congress settles this thing and the market explodes.” On Monday, it was more like “I better sell now, because I’ll be able to buy later as this thing drags on” (“This thing” being the Congressional deadlock over the budget and the debt ceiling).
The market is getting more volatile and bearish as the combined pressures weigh upon it. These include the Congressional wranglings, the negative seasonality of early October, and the technical deterioration of our indicators.
The Standard & Poors 500 Index ($SPX) has support at 1660-1670 and at 1630 below that. There is resistance at 1730.
The feature article goes into some depth as to what an overbought condition actually means. In most cases, a severely overbought market does not generate a sell signal right away (and neither does a severely oversold market generate a buy signal immediately). The most overbought and oversold dates in history are included in the article.
