Option Buyers Are Almost Always Wrong

The equity only put/call ratio is a great short-term, contrary indicator. The charts below clearly illustrate that theory by showing the option indicator right on top of the S&P 500's ETF price movements over the year ended Oct. 19, 2018. As the market peaked in late January 2018, put buying dried up. The put to call ratio dove to its lowest level, around 47%, in well over a year. Those option buyers couldn't have been more wrong. The SPY was about to plunge from north of 285 to south of 255 over the next two weeks. Ultra-high put buying, shortly after the broad market bottomed late in February, and again near the beginning of April, 2018, preceded huge very tradable upturns. Interim higher than average put buying interludes occurred again in mid-June and late September, 2018. They predictably came only after significant selloffs. From late June through late September the SPY surged from 268 to 293, a rise of 9.3%. By Oct. 22, 2018, the SPY had gained slightly from its mid-October low. If history repeats we're likely to see a substantial further upturn before long. What can traders do to benefit from knowing all this? When the equity put/call ratio gets top heavy you can feel safe bumping up long positions in stocks you favor, or add to holdings of index funds or ETFs. Those in search of individual names might be wise to consider Polaris Industries . The firm reported better than expected adjusted earnings on Monday, Oct. 22, 2018, and saw its shares surge by about $4 pre-market. Shortly after the opening PII had inexlicably dropped to a new 52-week low of $86.16. Based on all available data that made no sense. My own 15-month target price suggests a rebound to about $132 by the end of 2019. That's more than 52% above the current quote and doesn't figure in PII's well-covered 2.77% yield. The goal appears eminently reachable. PII topped out between $134 and $159 during five of the previous six calendar years, including 2018 YTD. Next year's estimate, reaffirmed by management at this morning's conference call, would represent a new all-time record. There is no reason to think PII can't exceed its old highs. The post-earnings, intra-day volatility in PII tells you that most people seem to have no idea what Polaris is really worth. PII ranged from $86.16 (a new 52-week low) to $97.92 just during the first few hours of trading. Trusted source, independent research from Morningstar, labels Polaris as a four-star, out of five, buy. They call PII's present-day fair value, as opposed to a one-year or 15-month goal, as $118 per share. PII's mangement team were open market buyers of their own stock in late July. Five company officers, including its CEO, purchased a total of 12,195 shares for a combined $1.277 million on July 27, 2018. There have been zero insider sales since then. We can now buy PII way cheaper than the people running the show, who best know the true value of the company. Option sellers can lock in tremendous premiums if willing to commit out to Jan. 15, 2021. With so much upside I'd be looking to sell in-the-money strikes ranging from $100 to $120. Worst-case, forced purchase prices dipped to between $75.60 and $81.50 when the stock fetched $86.59. Polaris hasn't changed hands for under $77 since 2016, when EPS were on pace for just $3.48 versus the now expected $6.53 for 2018 and $7.29 for 2019. Annual dividends rose from $2.20, in 2016, to $2.40 as well. In summary, market sentiment is very negative which makes the chance for a near-term rise quite likely. Polaris, in particluar, appears unjustly depressed and deeply undervalued. That combination led me to be a buyer of PII shares and a seller of its LEAP puts on weakness. That's my advice to you. Buy some PII shares, sell some PII Jan. 2021 puts or consider doing both.

Option Buyers Are Almost Always Wrong

The equity only put/call ratio is a great short-term, contrary indicator.

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