Dumb Money Confidence craters

Retail options traders rush for protection (by SentimenTrader)

Last week's reversal was one for the record books. While reversals always look impressive on a chart, generating a bevy of excited chatter and headlines, they are unreliable patterns. And retail traders aren't buying into the hype.

Two weeks ago, small options traders spent a tremendous amount of their volume on protective put options. They took a mild break after markets initially rebounded but now are at it again. Last week, they spent 29% of their volume on buying put options to open, among the highest levels in 22 years. 

Last week, the smallest of options traders bought $4.3 billion worth of put options and $4.5 billion worth of call options. So, their spending on hedges was 96% of their spending on speculation, one of the highest ratios in 22 years.

Our Backtest Engine shows only modestly positive medium-term returns but excellent long-term ones. That's because this kind of behavior only occurred during the depths of the worst declines of the past two decades.