Jun

5

An observation, not predictive, but perhaps relevant to the discussion of the put/call ratio:

Take (1) the combined daily volume of the offsetting P#wersh#res 200% ETFs SSO, SDS, QID and QLD, for the period July 06-present [because that's when they were issued], and (2) the combined volume of index puts and calls, as provided by the CBOE, for the same time period, and (3) create 10-day moving averages for each as a way to smooth them out, and (4) calculate daily percentage changes for these series of 10-day MAs, and then (5) run a correlation on those daily percentage change series. The result is a correlation of .95.

So the volume of index puts and calls and the volume of index ETFs are very, very highly correlated. One could argue that this isn't surprising if these ETFs use index puts and calls to accomplish their 200% objectives. I don't know all the nuts and bolts of their operation, but this seems like a logical conclusion: The ETF operators have become dominant players in the index option market. If they aren't the dominant buyers and sellers of index options then one must conclude that some underlying factor is driving the volume in both index options and index ETFs.

If the ETF operators are not the dominant index option traders, then whoever is buying and selling the ETFs is perhaps determining the index put/call ratio. Retail investors?

Could this be one way in which ETFs might be part of the process of constantly changing the game?


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