Tags: rick | pendergraft | Options | Traders | Too | Optimistic

Options Traders Are Too Optimistic: Look out Below

By    |   Tuesday, 16 Nov 2010 09:28 AM

The sentiment indicators just keep piling up for the case of the bears, at least when you look at it from a contrarian point of view.

The latest indicator that suggests that a correction is eminent is the Chicago Board Options Exchange’s Equity Put/Call Ratio. This ratio measures the number of puts traded to the number of calls traded and it excludes index options.

Now that you know what it measures, let’s look at the current stats for the CBOE Equity Put/Call Ratio.

The daily numbers can be quite volatile when you are looking at the mood of options traders, so it is best to apply a moving average of at least 10 days. I prefer to use a 21-day moving average as it gives you approximately one month’s worth of data.

Looking at the 21-day moving average of the CBOE Equity Put/Call Ratio for the last six months, this indicator hit a low last Wednesday with a reading of 0.58.

When a Put/Call Ratio hits a low, it is a sign of excessive optimism. As a contrarian, excessive optimism equates to a bearish sign.

Look at it this way, when everyone is bullish, it is likely that everyone has already bought in that is going to buy in.

When there aren’t any buyers left, there are only sellers left. When there are only sellers participating in the market, stock prices go down.

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The sentiment indicators just keep piling up for the case of the bears, at least when you look at it from a contrarian point of view. The latest indicator that suggests that a correction is eminent is the Chicago Board Options Exchange s Equity Put/Call Ratio.This ratio...
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2010-28-16
Tuesday, 16 Nov 2010 09:28 AM
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