The Obama Put (As Intention, Not Protection) ~ The Risk Averse Alert

Wednesday, September 09, 2009

The Obama Put (As Intention, Not Protection)

What I had intended to say tonight will have to wait because the StockCharts website has been down all night. That's okay because there is something else I have been meaning to mention.

The week before last saw OEX Put open interest pull ahead of Call open interest and I could not remember the last time this happened so early in the life of the front month contract. So, I looked back over my records and discovered that, exactly one year ago — late-August '08 — was the last instance when OEX Put open interest exceeded Call open interest with more than three weeks until options expiration. Before this was May '08.

Now, I generally take the view that options are used to hedge equity positions. However, up until only recently my accumulated experience over the past twenty-five years has been largely confined to an evolving bull market. An entirely different beast, psychologically speaking, lives right now however.

We've already seen how, post-March bottom, options apparently are being used, first, as position initiation vehicles, and then as hedges. Front month after front month has begun with OEX Call open interest decidedly exceeding Put open interest ... only to see the market rise and the disparity between Call and Put open interest shrink, such that by expiration week Put open interest (hedging long equity positions established when Call option contracts [presumably] are exercised) has entirely closed the gap with Call open interest.

So, seeing the September contract breaking the pattern established over the past many months ... discovering that the last time Put open interest exceeded Call open interest so early in the front month was late-August '08, and before that, late-May '08 ... and recognizing how the use of options as equity position initiation vehicles appears to be gaining ascendancy ... well, you see where this analysis is going. The [early] surge in OEX Put open interest we're seeing in the September contract is thought to be signaling an intention to establish short equity positions.

Tonight's lame speech on the need to push through health care "reform" given by the President of the United States before a joint session of Congress suggests this apparent short equity position intention might be well-placed. A lot of political capital is being spent on a project whose likelihood of freeing up a lot of speculative capital appears slim to none.


Carl Swenlin presented the above chart last Friday in a piece titled, "Looking Back." One remark he made I found particularly insightful:
"The big rally in 1930 occurred at a time that ... fundamental [economic/financial] problems had hardly been acknowledged, let alone solved."

Anyone thinking things are different this time should take pause. I for one strongly believe that, our present day fundamental problems share an eerily similar dilemma. Clearly the alarm clock has gone off, but much of the world still lies asleep, wistfully dreaming (with Tim Seymour and Joe Terranova being the Fast Money poster children)...

Fast Money
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Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

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