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Stock Market Trading:
Options Indicators
- Volume and open interest are important indicators in futures markets.
- Open interest
is the number of open contracts of a given
option. An open contract is either put or call that is not exercised, closed
or expired. Each open transaction has a buyer
and a seller, but for calculation of open interest, only one side of the
contract is counted. Open interest
increases when a buyer opens a put or call position and, vise versa, open
interest decreases when a buyer sells/closes a put or call position.
- Call/Put Oscillator. This indicator
is calculated by dividing the volume of call options by the weekly of put
options. An indicator based on the concept that options traders are usually
wrong near critical turning points. High readings are bearish, and low readings
are bullish.
- A leading indicator of the sentiments is the
call-put ratio. This indicator is calculated
by dividing the volume of call options by the volume of put options.
A call option gives the holder a right to buy. If the number of call
options are more than the number of put options, it indicates that more
people are interested to own the stock. In other words, a call-put ratio
of more than one indicates a bullish sentiment. The higher the ratio, more
is the bullishness. A call-put ratio below 1 indicates a bearish sentiment.
A call-put ratio of one indicates a neutral view prevalent in the market.
While the call-put ratio indicates sentiment, a look at the trend over
a period of time can also be a good indicator. Even though the call–put
ratios are greater than one over a period of time, it may not really indicate
bullishness if it is falling over a period of time. Conversely, call-put
ratios even if it is always less than one need not indicate bearishness
if it is a rising trend. Other words call/put ratio is a market sentiment
indicator not a trend confirmation indicator.
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