Sentiment and option pricing

On Friday I mentioned that puts are priced higher than equivalent calls on SPY. For example, today the SPY closed at 131.45.
Sep 120 put is bid 2.18, the Sep 110 bid 0.85
Sep 143 call is bid 1.21, the Sep 153 call 0.12

So the put 11 points out of the money costs almost twice as much as the call. The put twenty-one points out is six times as much as the call that far out. Six times! What does that mean? It means that option buyers and sellers are pricing in the probability of a big drop in stock by September, with minimal chance of a big rise.

Options on GLD show the opposite expectation. With GLD closing at 86.86
Sep 76 put is bid 0.65, the Sep 70 put is bid 0.20
Sep 97 call is bid 1.60, the Sep 103 call is bid 0.90

So option players on gold are much more willing to bet on a big rise than a big drop, the opposite of the pricing on SPY options.

The option premiums are a sentiment indicator, and odds favor the option buyers being wrong. Sometimes they beat the odds as no indicator is perfect. Given a choice, I would prefer to bet against a big decline in stocks, and/or a big jump in gold. When options premiums are so out of balance it favors those making bets on extreme moves being wrong again.

In normal times, premiums are about equal, with calls slightly more expensive than equivalent puts. Let's look at a third underlying: Research in Motion. RIMM has earnings out on Wednesday and the stock closed at 143.06

Jul 125 put bid is 2.74, Jul 115 put is 1.21
Jul 160 call bid is 3.30, Jul 170 call is 1.71

This shows slightly more people betting on a RIMM stock price rise than a drop. However, the premiums are not multiples of each other like the premiums on SPY and GLD, so there is no clear read on which way the option players are leaning.

Option pricing can indicate underlying sentiment. Sentiment tends to be more useful at market turns than in a trending market. My preference would be to bet against the option speculators, so that would translate into me being bullish on SPY and bearish on GLD. As always, what I write is not a recommendation to buy or sell, or investment advice. As always there are what I perceive to be low risk entry points, and high risk times to enter into a trade.