What does huge options volume tell us?

Week ended 25 November 2011 with XJO sitting at 3984

As the XJO lost 4.6% last week and broke below the 4000 mark, it gave the options market a lot of impetus. Weekly options volume over-took equities volume, which was less of a common occurence. Last week, as equities volume rose by 8%, options volume had a 72% increase. Examining the pattern between options and equities volume 5 weeks ago, would tell us a story about last week’s volume.

Five weeks ago, at the end of October, as the market closed the week 5% higher at a last recent high of 4353 on the XJO, in that week, options volume (just like last week) over-took equities volume. In the last week of October as weekly equities volume rose 8% (just like last week), options volume was higher by 52% for the week. What’s significant since end of October is that the market has since lost more than 8%. That spike in options volume was the peak of the market then.

With this similar pattern we saw last week, that is, weekly options volume taking over equities volume by a large percentage, could this be a signal of another pivotal point for the market? This time, reversing up?

Another interesting observation is the XVI.

From end October to last Friday, the CBOE VIX index has climbed from a reading of 24.53 to 34.37 on Friday. That’s a 40% increase in VIX with a corresponding 10% drop in the S&P500.

The XJO, however, has lost 8.5% in the same period, but its XVI has only risen from 24.78 at the end of October to 26.94 since last Friday. That’s less than a 10% jump. Comparing the XVI with the VIX, the XVI is much less volatile and more benign.

Another point of observation is that, in the last 5 weeks, the last time the XJO plunged to 4171 on 3 Nov and bounced off from there, XVI was at the depth of 31. Last week, as the market punched through the 4171 level and went even lower to under 4000, XVI was still at around 27.

This is telling me that the fear factor in the market this time around is less severe than when it was threatening to break the higher level of 4171 3 weeks ago!

Could these all be signs of a market turning around (to go up)?