This Time It's Different as Stock Traders Were Prepared for Rout

(Bloomberg) -- The sharp sell-off in European stocks over the past two days may seem to echo those in May and August, but there’s one significant difference. This time, traders were ready. Options contracts show market operators built protection against losses during the September rally.

The put-call ratio on the Euro Stoxx 50 had reached a peak of 3.4 on Sept. 24. And the 10-day moving average of the ratio was at its highest since October 2018.

The Euro Stoxx 50 fell 4.4% in the first two days of October, similar to the sharp pullbacks seen in May and August. What differentiates the latest tumble from previous ones is investor positioning, according to Day by Day technical strategist Valerie Gastaldy.

There was little complacency this time around as traders had braced for losses by hedging their bets. This bodes well for medium-term investors, who should ignore this latest decline, while short-term punters should take the opportunity to buy the dip, she says.

Just before the sell-offs in May and August, as the Euro Stoxx 50 was testing peaks, the call-put ratio was also at a high, signaling optimism. This time around, the ratio was lower as the benchmark climbed higher, indicating the market was focused on put trading, according to Gastaldy.

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