During the past week, we'd witnessed a couple of extremes in the daily (and intraday) put/call ratios we watch.  Analysts typically dismiss readings during option expiration, but over the years I've found that that's a mistake.  While we often see extremes immediately before and after an option expiration, that hasn't diminished their effectiveness at those times.

Another way I keep track of the data is watching a more detailed weekly breakdown of the week's activity across all the options exchanges.  And this week's summary provided an eye-opener.

The chart below shows a Speculative Options Activity index.  This is simply the number of opening options transactions that are bullish bets on the market minus those that are bearish on the market.  To be more precise, call purchases and put sales are combined (since they both profit if the market rises), and then we subtract the total number of put purchases and call sales (since they both profit if the market falls).

Constructed this way, the indicator will show a high reading if options traders expect the market to rise, and a low reading if they expect it to fall.  The chart below shows this measure over the past few years.

Here's a longer-term version of the same chart.

Granted, we're simplifying things here, since not every trader that sells a call, for example, is bearish on the market - they could in fact be net long by owning a greater amount of the underlying stock and wanting the market to rise.  But if they were so bullish, then they wouldn't have sold the calls.  There are surely a lot of games played in the options market with complex root strategies, but overall concept of the indicator should be sound.

What we saw in the latest week was a new all-time high in speculative activity.  The "bullish" side of the equation saw a total of 23.2 million contracts opened, while the "bearish" side saw only 20.6 million.  That difference of +2.6 million contracts surpasses anything we've seen since 2000.

There were only two weeks that had readings even remotely close to the current one.  On March 10, 2000 the differential reached +2.3 million contracts, and while the S&P managed to climb higher for another couple of weeks, it collapsed immediately thereafter as the market was forming the peak of the bull market.

On May 8, 2009 the differential also hit +2.3 million contracts.  This time, the S&P slumped 5% the following week and went pretty much nowhere for the next two months.

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