S&P 500's Put/Call Ratio Hits 5-Year Low: Fear Fades and Bottom Near?
Last Friday, with the $DJIA(.DJI)$
Fear Fades But Greed is Missing
The S&P 500’s Put/Call open Interest ratio, a gauge of market fear, has dropped to 1.63 yesterday, its lowest level in five years. This signals that traders are buying fewer crash insurance put options relative to calls. Historically, such lows have witnessed market bottoms during the 2020 pandemic selloff and the Sep 2022 slump. On the last two occasions when indices reached bottoms, we observed that both the Put/Call skew and the Put/Call open interest ratio dropped to lows. However, this time, only the Put/Call open interest ratio has reached a low point. Currently, the signal for a bottom is still missing the dropping of the Put/Call skew.
While traders aren’t panicking about a crash, they aren’t ignoring risks entirely. Demand for puts slightly below current index levels (hedging moderate drops) outpaces calls. SPX Put/Call skew ratio is still elevating (see chart above, blue line), showing cautious hedging rather than outright bearishness and there is no significant interest in call options. The 25 delta put skew of the S&P 500 ETF reached its peak on April 8 and has declined to +6.8, indicating a shift in market sentiment and moderation in the risk of bigger declines.
If we observe a decline in the SPX Put/Call Skew further, it could serve as a clearer signal of a potential market reversal. This diminished demand for protective puts relative to calls could imply that traders are becoming less cautious and are reducing their hedges against potential downturns.
The S&P 500's recent surge past 5,500, a former resistance zone, has been fueled by short-term options flows tied to trade war de-escalation hopes. But longer-dated options activity remains muted, reflecting low conviction. Mandy Xu, Cboe's head of derivatives market intelligence, notes that demand for out-of-the-money S&P 500 call options (bets on new highs) remains weak. The lack of call buying suggests doubt on the sustainability of the recent rally.
Nasdaq Plans to Expand 0DTE Options for Big-Cap Stocks and ETFs
$Cboe Global Markets (CBOE.US)$ reported that the average daily volume of index options in April increased by 17%. There is a upward trend in the trading volume of all types of options since 2015, with single stock options leading the growth. The growth in ETF and index option volumes also contributes to the overall increase but to a lesser extent compared to single stock options.
$NASDAQ (NASDAQ.US)$ plans to expand the expiration days of options on some big-cap stocks like $NVIDIA (NVDA.US)$ and $Tesla (TSLA.US)$ from Friday to also include Monday and Wednesday. This move aims to help investors manage portfolios better and may boost zero-day option trading for single stocks. Currently, 0DTE option trading is mostly for major indexes and ETFs. Nasdaq will only offer new expirations for big-cap stocks and ETFs meeting certain criteria. The change could start in the first half of 2026 if approved by the SEC.
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