Contrarian Moves: Retail Traders Intensify Market Crash Bets As Put Option Activity Surges

Major equity indices have enjoyed substantial gains in November so far.

In the first week of the month, the SPDR S&P 500 ETF Trust SPY recorded a 4% increase. The tech-heavy Invesco QQQ Trust QQQ outperformed with a 5% rally.

The catalyst for this bullish movement was a dovish Federal Reserve meeting. It was also weaker-than-expected job growth figures from the previous month. As a result, speculators began raising bets on potential rate cuts by the Fed in 2024.

According to the CME Group’s FedWatch tool, retail traders are now pricing in a full percentage point of rate cuts through December 2024.

Beneath the surface of these gains lies a growing divide in market sentiment. Retail traders are showing signs of caution despite the overall bullish trend.

Retail traders traditionally tend to be more sensitive to short-term market trends. Improving risk sentiment and rising expectations of a shift in the Federal Reserve’s stance next year have failed to excite them.

Retail Traders Bet Against Market Rally

Almost one-third of the options on the S&P 500 index purchased in the past week were bearish bets, indicating a lack of confidence in the current rally.

Delving more into technical details, data from the Options Clearing Corp. reveals that the ratio of put option buying to total option buying by retail traders reached 31% last week.

This ratio is one of the highest recorded over the past 24 years.

According to Jason Goepfert, founder of Sentimentrader, retail traders have been spending 80 cents on put premium for every $1 spent on call options.

This level of bearish sentiment is significantly above what was observed in July. It signals a notable shift in sentiment among retail investors.

“Small traders have used the rally as an opportunity to bet even more against stocks,” Goepfert noted.

The skepticism exhibited by retail traders presents a notable contrast to the prevailing market sentiment, which includes institutional and professional investors as well.

The CBOE’s equity put/call ratio, a key barometer indicating market mood, currently stands below the crucial 1 mark at 0.79, indicating that there are currently more opened call options on equities compared to put options, thus reflecting a broader market bullishness by investors.

Chart: CBOE Put/Call Ratio Indicates An Overall Positive Sentiment On Stocks