Measuring Stock Marketplace Thought Alongside The Index Put/Call Ratio

The recent post took a hold back at the Equity Put/Call Ratio (the ratio of position mass to telephone telephone mass for all listed options of private stocks across all exchanges) as well as what it tells us nearly the market.  Above nosotros come across a five-day moving average of the Index Put/Call Ratio (the ratio of position mass to telephone telephone mass for all listed options of stock indexes; information from e-Signal).  Interestingly, the 2 ratios since 2014 convey correlated entirely .25, which way that they part a petty over 6% of full variance.  This suggests that the 2 measures business office differently vis a vis sentiment.  If a portfolio managing director has a long/short mass as well as wants to speedily hedge a internet long position, buying index puts could hold upwards a quick way of accomplishing that.  If that same managing director wanted to limited a take in inwards a unmarried advert or hedge a directional exposure to that item stock, the options for that stock would hold upwards the most effective expression, liquidity providing).  

Another interesting characteristic of the Index Put/Call Ratio is that it has varied wildly over recent years.  In 2007, nosotros routinely saw 20-day averages inwards a higher house 1.70.  As y’all tin come across from the nautical chart above, nosotros convey never seen such a high reading during the catamenia since 2014 as well as indeed convey non seen that sort of reading since 2010.  We fifty-fifty convey an example of variation inwards the ratio inwards the recent data.  Note how, since the Oct 2014 drop, nosotros convey seen higher put/call ratios than before inwards the year.  In other words, coin managers are doing to a greater extent than hedging instantly than before inwards 2014.

The absolute values of the Index Put/Call Ratio produce incorporate information, simply it’s tricky given the wandering hateful of the distribution as well as the correlation to concurrent cost change.  Since 2014, the Index Put/Call ratio has correlated -.56 alongside the pct of SPX stocks trading inwards a higher house their five-day moving averages.  This is what nosotros saw alongside the Equity Put/Call Ratio:  at that topographic point is a vogue to purchase puts afterwards brusk term declines as well as vice versa.  Sentiment is quite sensitive to recent cost movement.

Since 2014, when the Index Put/Call Ratio has been inwards a higher house 1.0, the adjacent 5 days inwards SPX convey averaged a arrive at of +.68% vs. +.22% for the residual of the sample.  When either the Index or Equity Ratio (or both) convey been inwards a higher house 1.0 (87 trading days), the adjacent 5 days inwards SPX convey averaged a arrive at of +.82% vs. no alter for the residual of the sample.

In short, it does seem that options ratios nation us something nearly sentiment; that index options reverberate dissimilar take in issues than equity options; as well as that teasing apart the ratios from recent cost alter mightiness furnish a purer mensurate of the value of options-based take in equally a predictor of short-term cost action.

Further Reading:  Measuring Sentiment Intraday 
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