Institutions are scared (by Sentimentrader)

Institutions are scrambling for protection

In February 2021, small speculators were going bananas. At the time, we showed what was perhaps the most remarkable chart that we'd seen in our entire careers. Until now... This time, it's not small options traders that have panicked. And it's not FOMO that's causing it. Rather, it's the largest traders in the market, and they're buying protection against a crash at a pace unlike anything the market has ever seen. Last week, traders of fifty or more contracts bought to open nearly five million put options. More importantly, they spent a whopping $8.1 billion on those contracts. That is almost double the amount of any other week in 22 years. With options trading, it's essential to consider both sides. Sometimes, when there is a spike in put buying, it's because overall volume is higher, and there is a coincident spike in call buying. So, we prefer to net them out, which is what the chart below shows. It reflects the net dollar value of premiums that institutional traders spent on buying calls to open minus buying puts to open. The lower the blue line, the more they spent on puts. As we can see from the chart, it has plunged to a record, far beyond anything we've seen in 22 years. So, why hasn't the VIX "fear gauge" spiked along with this scramble for puts? It could be due to a number of factors, like traders buying puts on stocks not included in the S&P 500. Or buying options with longer expiration dates. Whatever the explanations, the data is clear - institutional traders are in a mad scramble for protection.

What the research tells us...

The largest options traders spent a record amount on put options last week. Their total hedging activity is far beyond anything seen in 22 years. Short-term, that may be a concern, but long-term, it should be a bullish factor. Large speculators are also heavily shorting index futures.