XJO at 4200

by Raymond Chan

One of the standout feature from observing last week’s options actions on the XJO options was the drop off in volume, especially on the call side. In the first and second week of August when global markets experienced tumultuos trading, volume in XJO options spiked to more than 400,000 weekly traded contracts on the XJOs. Last week (ended 26 Aug 2011), we had under 200,000 weekly contracts traded on the XJO options.
 
This level of lower volume is at the same level we experienced back in the first week of July, some 6 weeks ago. What sets these two periods apart despite similar trading volume in XJO options is the level of the XJO.  In the first week of July ended 8 July, the XJO was sitting at 4654 (which is now the last high), whilst last week, the XJO closed at 4200.
 
If the last time we experienced this sort of drop off especially on the call side, was the last top, then the question from this observation is that now at 4200 are we at the new high for the market?
 
As traders get cautions, they will be less inclined to go long and hence will translate to less trading on call options. This could be a bearish signal on the XJO, especially if over the next few days, trading in XJO call options continue to drop off.

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