Options ratios for sentiment by James P. Martin
As options activity on equity indices and commodity futures has soared in the past few years, more and more market analysts have relied on options ratios as indicators of market sentiment and contrary opinion. Until recently most analysts looked only at the volume of calls and puts. Here we go a step further, examining the simultaneous changes in options volume and open interest. By studying these changes, we may look deeper into options players' true directional biases.
Before discussing the significance of analyzing option open interest with volume, first we must clear up a minor semantic issue. Most analysts compute the ratio of puts divided by calls (Stan Weinstein is a notable exception), but I have always computed calls divided by puts . My rationale for doing so is along the lines of high prices = high enthusiasm = high call/put ratios = high danger and conversely, low prices = low enthusiasm (high pessimism) = low call/put ratios = low risk. Also, I have always seen calls listed before puts; hence, computer data entry is facilitated by listing calls first.