Customer Option Activity by Arthur A. Merrill, C.M.T.
The Options Clearing Corporation issues a weekly report to subscribers that lists the totals of options bought and sold on all exchanges nationwide. The transactions are segregated by customer, market makers and by firm. Technical analyst Robert Nurock developed an index of professional activity based on the buying and selling of puts and calls. I've applied his idea to the customer area.
If the public (customers) are optimistic and are buying calls, the calls are being supplied to them by smart money– the professionals. This should be a bearish sign. If the public buys puts, they are pessimistic, and their puts are supplied by smart money. Quite bullish! To put this into the form of an index, Bob Nurock suggested the formula in Figure 1 (I've changed it from
professionals to customers). The denominator is the total activity. I multiply the ratio by 100 to put it into percentage form and smooth with a 33% exponential average. This is the index shown in Figure 2. High figures are bearish; low figures are bullish.