Bearishness Back To Extremes

Last week saw a noticeable increase in bearish sentiment within the options market. For example, the ISE Sentiment Index (ISEE) produced a series of low readings. The ISEE is a unique indicator developed by the International Securities Exchange [ISE], today’s largest exchange for trading equity puts and calls. The indicator tracks call buying divided by put purchases on the International Securities Exchange [ISE]–options sales are ignored. Therefore, when put buying, or bearish bets, increase relative to call buying (bullish bets), ISEE will fall. It fell below 100 (more put than call buys) three times last week. As a result, the ISEE ten-day average is now 105, which is down from 129 two weeks ago and not far from its lows in mid-July when it dipped to 103.

Bollinger’s Put Volume Indicator [PVI] also suggests that investor bearishness is once again at extremes. Developed by John Bollinger, PVI tracks the day’s put volume divided by a ten day average. It can be applied to any stock, index or market to gauge put activity relative to normal levels. For example, when applied to trading across all of the US options exchanges, the put volume indicator reached a high of 1.66 on September 4 (see figure 1). The spike pushed PVI to its highest levels since January 8 and hints at extreme levels of put volume in the options market. It rose again on September 9 (to 1.57) and confirms that options traders are beginning to lean heavily on the put side of the trade, which has historically occurred when bearishness is at an extreme and the market is oversold.

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