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Tutorial on Real Time Put Call Ratios
As a trader, speculator or investor, it is important to have access to all of the tools that the professionals have. The Real Time Put Call Ratio is one of those tools, providing valuable insight into overall market sentiment. Now, Hamzei Analytics' Real Time Put Call Ratio gives you a leg up on the market, letting you see where the action is before the news leaks it out.

Our Real Time Put Call Ratio screens show actual volume of calls & puts, dynamically updated throughout the day. Sorted by each column, both simple & dollar weighted ratios are displayed.

There are many schools of thought on what exactly is a bullish ratio and what is a bearish ratio. Generally, the simple put call ratio of 1.5 on an index is used as the level of relative neutrality. Anything higher than that is considered bullish and anything lower is considered bearish.  The dollar-weighted ratios vary from index to index and each index historical norms need to be referenced for proper deduction.

For individual equities, the analysis of the Put Call ratios becomes less clear. This is because options on these issues are used more for speculation than hedging. At Hamzei Analytics, we like to separate option trading activity into two camps: "Smart Money" and the "Herd Mentality."

Smart Money is investors-in-the-know. These are professional traders and institutions, who are using options to take leveraged positions in a certain product.

For example, when a trader has reason to believe a company is going to have positive news such as an upside earnings surprise, the Smart Money will begin be long calls or short puts. The opposite will happen when negative news is expected; Smart Money will go long puts or short calls in volume. This is not to say that this is an indication of insider trading. Rather, it's an early indication when market sentiment starts to turn direction on a particular stock or sector. Therefore, trending ratios in either calls or puts in this stage are reinforcing indicators of direction. This type of activity is not a hedge, it is a leveraged bet.

Once sentiment picks up in the market, it spreads like wildfire from the institutions to retail. This brings us to the Herd Mentality, which is almost always late -- and almost always wrong. For that reason, the movements of the Herd are contrarian indicators.

For example, if a particular company is receiving a lot of positive media attention, call activity will increase and so will the call premium. The Smart Money bought these calls when they were inexpensive and started the trend that can sometimes turn into hysteria. The Herd will keep thundering into the calls, pushing the sales volume -- and the premium -- even higher. That's when a stock is likely to be in an over-bought condition, reflected in an excessive swing in the put call ratio. Or, negative news on a company may prompt massive buying of puts until the stock is over-sold.

At Hamzei Analytics, we give you Real Time Put Call ratios so that you can track the activity in your favorite stocks and indices from the early stages of the Smart Money to the late stages of the Herd Mentality. The advantage of Hamzei Analytics' Real Time Put Call Ratio is that it enables you to view changes in investor sentiment as they occur. Unlike other put call ratios that are based on settlement prices or delayed data, Hamzei Analytics' Real Time Put Call Ratio is the only online tool that offers broad-based, dynamically updated put call ratios that reflect both changes in volume and options premium.

While using Hamzei Analytics' Real Time Put Call Ratio, it is worth noting:
  • SPX options are used widely by institutions to hedge against existing stock portfolios. SPX is a European-style option, meaning it cannot be exercised before expiration. Thus, much of the activity in SPX buying calls or puts and hanging onto the position until expiration is used for hedging and is not speculative in nature.

  • OEX, which reflects the S&P 100, is largely a retail product. Like equity options, OEX is an American-style option, meaning it can be exercised at any time up to expiration.  The Volume in OEX options has been steadily decreasing in favor of SPX. Nestor Turzcan uses OEX Dollar Weighted PCR for intraday market timing.

  • NDX and MNX are based on the NASDAQ 100, but do not have the volume as the more-popular QQQ options.  Dollar Weighted PCR for NDX is worth watching.  Scott McCray uses this to time his entries.

  • Options on individual equities are attracting more retail participation. Many retail investors are "playing" equity options as a surrogate for trading the stock, but often with a short-term horizon.  Monitoring Hamzei Analytics' exclusive Put Call  Baskets will give clues on where the options activity is concentrating within an index or a HOLDRS, and where it is not.

Chat with Fari on Fari Hamzei writes for CBOE Options Hub on event-deriven basis       Futures & Options for Stock Indices
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