Published: December 14, 2009
I hope you haven't bought silver....
As I'll show you in a minute, right now, traders are making far
more bullish bets than bearish bets in silver.
So if you're a contrarian trader, you should be selling silver,
not buying it.
What about financial stocks? Traders are much more interested in
the short side of financial stocks than the long side.
Contrarians should be buying banking stocks, not selling them.
If you can time it right, the surest way for you to make a quick
buck in the stock market is to bet against the crowd at
extremes. When you see traders all piling onto the long side of
the market and ignoring the short side, you know betting on the
short side is more likely to show the profit. This is called
Today's contrarian indicator comes from the options market.
The options market is great for measuring sentiment. It is much
more speculative than the stock market. Traders make crazy bets
on short-term outcomes, using lots of leverage. They wear their
hearts on their sleeves. Also, the options market is a zero-sum
game. One trader's profit is another trader's loss. So it's
always clear who the bears are and who the bulls are.
To tell which side of a trade is popular, simply compare the
prices of call options with the prices of put options. Call
options are bets stock prices are going to rise. Put options are
bets the prices are going to fall. If call options are more
expensive than put options, you know there's more demand for
them than demand for put options.
Let's take financial stocks as our example. We'll use IYF. It's
the iShares exchange-traded fund (ETF) for the large banks and
brokers. (I recorded the prices at last Thursday's close.)
As you can see, making the bearish option bet costs over 50%
times more money than the bullish option bet. Therefore, the
bearish bet is far more popular than the bullish bet among
Let's repeat this exercise with silver, using the silver fund (SLV)
as our proxy...
In banks, the bearish trade was more popular. It's the opposite
case with silver. The bullish bet costs almost 40% more than the
bearish bet. There must be many more bulls than bears in silver.
I repeated this exercise with ETFs for the S&P, gold, oil, real
estate, Chinese stocks, Russian stocks, and gold stocks. I
compared option strike prices 10% above and 10% below the
current price, with maturities between February 2010 and April
2010. Here's what I found...
Of all the investments I looked at, the S&P 500 and gold
produced the most interesting results. On Thursday night, when I
worked on this, it was a coincidence SPY (the S&P 500 fund) and
GLD (the biggest gold fund) both closed the trading session with
the same price per share... $111. But look how different their
March 2010 option prices were...
With both GLD and SPY trading at $111, the...
- GLD $120 call option was $3.09
- SPY $120 call option was $1.25
- GLD $100 put option was $2.08
- SPY $100 put option was $2.30
Look at the GLD call option. It's almost three times more
expensive than the SPY option. On the other hand, the SPY put
option is more expensive than the GLD put option.
Said another way, gold is a lot more popular than the S&P 500
among options traders right now.
I'm not saying you should short gold or buy the S&P 500
immediately. I'm merely pointing out sentiment is lopsided right
now in these two investments. If you're a contrarian, trade
-- Tom Dyson
Editor's Note: This
article originally appeared in