Introduction
Options data, often overlooked by those who don’t directly trade options, can be a goldmine for assessing market sentiment and gauging potential stock movements. Here, we explore three key options metrics that can serve as a sentiment barometer for any stock trader:
Key Metrics to Watch
- Open Interest
- Put/Call Ratio
- IV Skewness
These metrics provide valuable insights into market dynamics and potential trend shifts in stock prices. If you want to use them easily, feel free to check my app here
Practical Tip : Option data can easily be access for major stock with yfinance for free
import yfinance as yf
import pandas as pd
def get_options_data(ticker):
# Load the ticker data
stock = yf.Ticker(ticker)
# Get available options expirations
expirations = stock.options
# Initialize an empty DataFrame to hold all options data
all_options = pd.DataFrame()
# Loop through all available expiration dates and get the options data
for date in expirations:
# Fetch the call and put data for the current expiration date
opt = stock.option_chain(date)
# Combine the call and put data
current_options = pd.concat([opt.calls, opt.puts])
current_options['Expiration'] = date # Add the expiration date to the DataFrame
# Append the current options data to the all_options DataFrame
all_options = pd.concat([all_options, current_options])
# Clearly Identify Call and Puts
all_options["Type"] = all_options["contractSymbol"].copy()
all_options["Type"] = all_options["Type"].apply(lambda x:x.split(ticker)[1][6])
all_options["Type"] = all_options ["Type"].map({"C":"Call", "P":"Put"})
return all_options
Understanding Open Interest
Open interest represents the total number of outstanding options contracts that have not been settled. For each new option contract that is opened, open interest increases by one; it decreases by one for every contract that is closed. This number gives traders an idea of the liquidity and size of the market for a particular option.
Some traders use the highest open interest strike price as a marker for potential support or resistance levels in the underlying stock. This concept is tied to the “max pain theory,” which posits that the stock price might gravitate towards the strike price at expiration where the most options (both calls and puts) would expire worthlessly, causing the maximum financial loss to option holders.
Analyzing the Put/Call Ratio
Terminology Alert : The put/call ratio measures the volume of trading in puts versus calls.
\[\text{Put/Call Ratio} = \frac{\text{Volume of Puts Traded}}{\text{Volume of Calls Traded}}\]This ratio is calculated by dividing the total volume of puts traded by the total volume of calls traded over a specific period, typically one trading day. In practice, the put/call ratio can be derived from options across all strikes and maturities, not just those with the same strike price or expiration date. This comprehensive approach provides a broader view of market sentiment, capturing the general trading behavior towards puts versus calls across the entire options market. Traders use this ratio to gauge overall market sentiment, identifying whether there’s a prevailing bearish or bullish inclination among participants.
A higher ratio indicates more put buying (commonly seen as bearish sentiment), whereas a lower ratio suggests more call buying (typically viewed as bullish sentiment). This ratio can act as a contrarian indicator, hinting at possible reversals if predominantly one type of option outweighs the other significantly.
Traders often look for extremes in this ratio on their trading platforms to assess whether the market sentiment is overly pessimistic or optimistic, which might indicate a potential reversal in the stock’s price movement.
Conclusion
While not everyone may trade options, the data derived from options markets can offer crucial insights into broader market sentiments and potential shifts in stock trajectories. By integrating open interest and put/call ratios into your analysis, you can gain a more nuanced understanding of market dynamics and better prepare for future movements. Remember, these tools should provide additional layers of insight and are not standalone decision-makers.