2007 Sep 24 - Mon

Sentiment Indicators with Option Statistics

When I have the time, I've been spending it adding capabilities to my trading software. My current addition is an Option Watcher. Nothing to really trade, just some thing to watch the state a complete options list for the trading instrument in which I'm interested.

A while ago, or rather, a long while ago, I looked into trading options. That turned out to be a very complicated endeavor. I decided to set it aside and come back to it later. Now isn't quite the 'later' I was thinking about, but I've been keeping them in mind. An article by Jeff Neal from Optionetics expanded upon the recent thoughts I've been having with his article called OUTSIDE THE BOX: Option Statistics as Sentiment Indicators. Here are a few choice exerpts where he says things better than I can:

One of the best ways to get a handle on sentiment in a particular stock is to monitor the activity of option traders. For instance, monitoring and tracking option volume and option open interest changes can reveal important information in regards to the expectations of traders, as well as how they may be positioned.

Option volume when unusually high can often times can identify explosive moves and identifies for the trader just where the action is taking place.

To best forecast a directional change in the market, it is important to monitor the daily gyrations of open interest. The thinking is that small investors are typically on the wrong side of a rally, an unusual increase or decline in the open interest of put and/or calls often signal a change in directional bias. Usually an abnormal rise or decline in open interest sends a contrarian type signal to the sentiment trader.