36 lines
2.5 KiB
Plaintext
36 lines
2.5 KiB
Plaintext
Chapter 29: Introduction to Index Option Products and Futures 521
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Example: The morning paper shows that yesterday the trading activity for OEX
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options was:
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Total OEX Call Volume: 125,000 Contracts
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Total OEX Put Volume: 135,000 Contracts
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Therefore, the ratio is:
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. 135 000 Index Put-Call Ratio= ' = 1.08 for yesterday
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125,000
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This technical indicator is a contrary one. The contrarian thinking is along these lines:
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if everyone is buying puts, then everyone must be bearish; if everyone is doing some
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thing, they can't all be right; therefore the contrarian must assume a bullish stance.
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So, if the put-call ratio is high, too many traders are buying puts; a contrarian
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would interpret that as a bullish sign. Conversely, if the put-call ratio is low, too many
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traders are buying calls; the contrarian would consider that as a bearish indicator. The
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theory behind contrary systems is that the majority of traders are wrong at major
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turning points in the market.
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There are several typical put-call ratios that can be computed. Generally, one
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would not want to mix different types of options. For example, the equity put-call
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ratio uses the option trading volume of equity options only. The index put-call ratio
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uses index options only. Each futures contract put-call ratio is generally computed
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separately, gold, soybeans, currencies, etc. One might also attempt to screen his input
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a little further: for example, the index put-call ratio should only include index options
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on U.S. exchanges; the others can be computed separately.
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Obviously, the more highly traded option contracts produce a more reliable put
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call ratio: equity options and index options being very liquid. Gold futures options by
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themselves are not that active and may produce distorted results for a period of time.
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The Ratio Itself. Traders and investors almost always buy more calls than
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puts where stock options are concerned. Therefore, the equity put-call ratio is
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normally a number far less than 1.00. If call buying is rampant, the equity put
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call ratio may dip into the 0.30 range on a daily basis. Very bearish days may
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occasionally produce numbers of 1.00 or higher. An average day will generally
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produce a ratio of around 0.50.
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Index options, however, produce much larger ratios. Many institutional and
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other investors are constantly looking to avail themselves of the protective capability
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of index puts. Therefore, far more index puts are purchased than are equity puts. An
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average day might produce readings of 2.00 for some indices. |