Puts Instead of Shorts? Today's Activity

by: Bill Luby September 19, 2008 | about stocks: DIA / QQQQ / SPY    

Bill Luby

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The table below shows call and put activity at the International Securities Exchange [ISE] during the first two hours of today’s trading. Keep in mind that this is a “call to put” ratio, not the “put to call” ratio reported by the CBOE.

As reflected in the table, right out of the gate there was a flood of calls for indices, ETFs, and individual stocks. Note that in the last hour or so, the activity has tilted heavily toward the put end of the spectrum, as the call to put ratios have dropped dramatically. It is difficult to differentiate between hedging and speculation in these transactions, but now that options spreads seem to be tightening and implied volatility is dropping sharply, I suspect those looking to get short financials and any other part of the market may be leaning toward puts.

It will be interesting to see how the options market is affected by the new shorting regulations.

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This article has 10 comments:

  •  
    Sep 19 07:12 PM
    It is doubtful that all the contradictions in the SEC's temporary ban on short sales will be worked out before the ban is lifted.

    However, the existing rules against naked short selling will be enforced and they're not going away.

    So, if you want to make money as a naked short seller, you may have to go elsewhere.

    Speaking of which, I hear that Brazil is now promoting a few secluded beaches where naked short sellers will be allowed to congregate. However, I don't think they'll be allowed to buy or sell anything. :-)
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  •  
    Sep 20 09:18 AM
    There may be a greater use of puts, but that vehicle does not damage a stock the way shorting does. Shorts had three weapons (1) recognizing a truly overvalued co; (2) spreading rumors regardless of a company's intrinsic value and (3) mercilessly selling regardless of a company's intrinsic value in an attempt to drive down the shares. Only the fist weapon is appropriate, but the other two still existed and were, in my opinion used. Puts still permit bets based on the first approach, can still permit the second approach, but remove the ability to sell shares as part of a coordinated effort to drive th co down. Accordingly, I think the new rules are appropriate. The short sellers are screaming, but to teh extent they serve a legot purpose in identifying problem companies, they can contiue to do so and rely on puts. Barring the shorts prevents bear raids on otherwise solid companys.
    My HO only.
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  •  
    Sep 20 10:27 AM
    The outright ban on shorting was a knee jerk reaction and one that will in fact be seen to have been wrong (not completely) and certainly not fully thought through.

    Thankfully some semblance of reality has arien to allow Market Makers to short stocks where they write Puts. Now to scream and say this should be banned also is 100% wrong, because those long a stock in these volatile markets need a mechanism to insure against any downward pressure on their portfolio.

    That said this may see an increase to allow shorting by the backdoor. I have been long many financial stocks and have been grateful many times for the ability pt buy and sell puts depending on how I manage my portfolio.

    So while I welcome some stability I do think that by allowing market makers to short it will reduce some volatility and also allow some orderly way to arrive back to being able to short stocks. If not then there would be such a massive pent up demand for shorting a stock when the ban was lifted.
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  •  
    Sep 20 11:00 AM
    I believe there was large scale algorithmic shorting. This implies that computers do the trading and the result is a waterfall of falling share prices.

    So if a company is attacked the attacker is likely to be a swarm of computers that take over the market. I believe this should be researched and perhaps limited by the regulators.

    I also believe that a lot of the exaggerated trading was becaause of quadruple trading as was in March this year.
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  •  
    Sep 20 11:01 AM
    Could also just be a normal reaction to two very large up days.... The expectation is that the market will now correct back down ...You either cash in your profits as Cramer is suggesting, or it's time for some protective puts.... jegan ;-)
    Reply | Link to Comment
  •  
    Sep 20 11:31 AM
    Eh. Had they just kept the uptick rule then we wouldn't have this problem and the longs and shorts could have lived happily with each other.
    Reply | Link to Comment
  •  
    Sep 20 11:36 AM
    What good does buying puts have if the Gov't won't let you short? It seems to me like buying a put would be for nothing on financials if the gov't won't let stocks go down. If they can't go down, they can only stay flat(bad for long put holders) or up(even worse for long put option holders)
    Reply | Link to Comment
  •  
    Sep 20 12:37 PM
    I agree that more regulation is require for system that does automatic shorting.
    Reply | Link to Comment
  •  
    Sep 20 01:02 PM
    J-unit Steve Liesman reported that Market Makers are now able to short any stocks they write Puts for.
    Reply | Link to Comment
  •  
    Sep 20 02:51 PM
    Shorts do not mean anything in and of themselves. Naked shorts mean that when the short is covered nothing is delivered but money, and that only the dealer who believed it was covered could have prevented the short sale, but the commission got in the way, and you know how that goes. But, Puts are something else, they have an economic value related to the stock. It is the put seller who needs the short sale to lay off his risk. So puts will be repriced -up- to compensate for the added risk of the seller. The free lunch for the forbidden short institutions is that they become take it or leave it. In the past markets have languished when shorts were forbidden. I think it is very negative for the long run health of the markets, but they are going to die anyway.
    Reply | Link to Comment
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