Part 2: Index Option Value put/call ratios
Option World: Specific statistics and details for each individual contract month
This is part two of index options put/call ratios. You are advised to view the less complicated charts in part one before attempting to view and understand these charts below. Part one can be viewed by clicking the link above.
Legend:
The CBOE put/call ratio represents the CBOE exchange's total put volume divided by the CBOE's total call volume. However, this widely reported value may not reflect the nuance of a particular index. So we have probed into the CBOE's data and determined each individual index option's put/call ratio. Below are the put/call ratios of the CBOE's top 5 most active indices.
Below are the composite put/call ratios. We use the term composite to mean the sum of all puts and calls traded in all actively traded contract months. This produces one aggregate put/call ratio for each index option. In addition, each individual index option trades many different contract months simultaneously and each contract month can have its own put/call ratio. For a detail of each contract month ratios, visit our Option World.
Part 2
In part one, the index option composite put/call ratio and the CBOE exchange's daily put/call ratio was explained and illustrated. In part 2, the option values are used to create put/call ratios and are added to the charts.
Creating value based put/call ratios is more complicated, but easy to understand. Whereas the normal put/call ratio compares the put volume to call volume, the dollar weighted put/call ratio is simply the volume times the price. The daily total volume at each strike price is multiplied by the last price for both calls and puts. This computes the value of those options traded. Then the value of all calls is totaled and the sum of all put values is totaled. The dollar weighted put/call ratio is simply the total put value divided by the total call value. Using value rather than the number of options is considered to be preferred ratio because it shows the ratio of money in the option market, since it's all about making money.
Another ratio on the charts below is the total dollar weighted value divided by the total option volume. Each day the total value of options traded is computed by adding the total value of calls and puts for all strike prices and all contract months. The total option volume is simply the sum of the trading volume at all strike prices and contract months of all calls and puts. Did you ever wonder how expensive options are? Well, this ratio shows you when options are unusally expensive or when they are at bargain basement prices.
These charts are a bit "busy" but the point here is identify which ratio or ratios works best. As you can see each ratio has a different range of values and peaks at different times. The first observation with value ratios is that the range is typically wider than with the traditional put/call ratio. Another generalization is that they track the traditional put/call ratio very closely. The difference is that the dollar weighted ratios get more extreme at swing points in the underlying index.
Some noteable spikes occurred in the NDX option market, but their usefulness to make money is 50/50 at best. The DJX option market is currently (9/19/03) showing an extreme. The last time this occurred the prices declined for a week. But given the facts presented, the odds of using spikes successfully is only slightly better than 50% so it's no guarantee. In the OEX option market the total dollar weighted value to total option volume ratio shows how sensitive this market is to option expiration. The lowest values are near expiration and the highest values are after the rollover. This pattern is to be expected, but since this market trades from month to month most of the money spent on options is in the front month whereas with the other indices, the money spent on options is throughout a variety of contract months. Many of which trade two years out into the future. So the other indices don't show this monthly swing in values, or cyclic pattern, as does the OEX option market.
As a final thought, these charts show how hard it is to use option data to find great trades. Extremes seem to be only 50% effective. These odds won't break the bank and they don't provide investors with much of an edge.
If you get dizzy looking at these charts, then go back to part one. Click this link to return to part one to see the index option put/call ratios with the CBOE put/call ratio. Index Option put/call Ratios
created 9/19/03, ©2003 The Small Investors Software Co. All rights reserved.