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How Equity Options are Still in Bullish Mode

It's Just Around the Corner

NB: This is one data point out of many, and should not be used as a holy grail but rather a contextual clue in the market narrative. Caveat emptor.

One of the more cliche terms out in trading is the "Wall of Worry." It means that there are always badthings for investors to be concerned about while the market persists in an uptrend. It's a psychological component of the market and it does exist, and it can be directly observed in equity options market.

Below is a chart of SPX implied volatility on 3 different timeframes: 30 (red), 60 (yellow), and 90 (green) days. Notice that for the most part the longer term volatility will tend to stay more bid than the shorter term volatility:

What is this telling us? Let's take a dialogue from the collective voice of the options market:

Well, yeah... clearly the trend in the market is up and on the short term there isn't anything that can really slow it down. But just around the corner, we've got eurozone debt issues, deficit ceilings, longer term resistance levels, p/e ratios, and QE2 ending. So we're in the clear for now, but it'll get ugly come summer... sell in may, go away, right?

The rationale behind this changes with respect to the current newsflow, but this kind of sentiment was what persisted back in 2010. This is a condition that will not last forever, but as long as we see this sentiment continue, this will be a bullish data point.

 

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/