Why a surge in put-option purchases may be a positive signal for stocks
Historical analysis shows: a spike in put-option purchases has sometimes preceded gains in the S&P 500 and Nasdaq-100
Over the month following signals, the S&P 500 has gained an average of 0.62%, compared to the usual 1.18% since 2016. However, this result was significantly distorted by the signal recorded before the market collapse due to the COVID-19 pandemic in March 2020.
The analysis covered stocks included in the S&P 500. A signal was defined as the first instance in at least a month where the 10-day ratio of new put- to call-option purchases exceeded 0.65. Put options are often used for betting on declines or protecting positions, so increased demand for them may reflect heightened caution among market participants.
Excluding the March 2020 episode, the average return of the S&P 500 after such signals was 0.09% over one week, 1.57% over two weeks, and 2.03% over one month. The author of the analysis believes this is why a surge in put purchases can, in certain cases, serve as a positive signal for stocks, though it does not guarantee index growth on its own.
The most recent signal for S&P 500 components appeared on October 30—just before a sharp market movement the following week. On Thursday, the index fell by more than 4%, and on Monday, it rose by 2.3%.
A separate review was conducted for stocks in the Nasdaq-100, using a higher ratio threshold of 0.70. The most recent signal for this index appeared on November 4. Average results after such signals also indicated significant growth potential over the observed timeframes, though exact figures were not provided in the given excerpt.
