What is a put/call ratio and
how is it used?
The put-call ratio is simply the number of puts traded divided by the
number of calls traded. It can be computed daily, weekly, or over any time
period. It can be computed for stock options, index options, or future
options. Some market technicians suspect that a high volume of puts relative
to calls indicates investors are bearish, whereas a high ratio of calls to
puts shows bullishness.
Many market technicians find the put-call ratio to be a good contrary
indicator, meaning when the ratio is high, market bottom is near, and when the
ratio is low, a market top is imminent. The more highly traded options
contracts produce a more reliable put-call ratio. Traders and investors
generally buy more calls than puts where stock options are concerned.
Therefore, the equity put-call ratio is a number far less than 1.00. If call
buying is heavy, the equity put-call ratio may dip into the .30 range on a
daily basis. Very bearish days may occasionally produce numbers of 1.00 or
higher. An average day will produce a ratio of around .50 - .70.
Once again, the numbers are interpretive numbers. Here are some numbers that
may be used for illustrative purposes:
Index P/C Ratio
Bullish 1.5 or higher
Bearish .75 or lower
Neutral .75-1.5
Equity P/C Ratio
Bullish .75-1
Bearish .4 or lower
Neutral .4-.6
The Option Industry Council's website provides two sources for put/call
ratios:
Excel or Text format or use the Volume Query.
Can you please help me understand what is the meaning of "skew" in options?
The basic idea behind skew is that options with different strike prices and
different expirations tend to trade at different implied volatilities. When
implied volatilities for options with the same expiration are plotted, the
graph resembles a smile, with at-the-money volatility in the middle and
out-of-the-money options forming the gently-rising sides. As options go into
the money they gradually approach their intrinsic value, and an option trading
at its intrinsic value has an implied volatility of zero, so for our graph we
use call prices for strikes above the current underlying stock price and put
prices for strikes below the current underlying stock price.
There is a mathematical reason that skew appears as the "volatility smile"
described above: most option pricing models assume stock prices are
log-normally distributed, but in the real world stock prices deviate slightly
from that model. Specifically, the Normal Distribution underestimates the
probability of extremely large moves. In order to compensate, traders ‘tweak’
their models by using a higher volatility for out-of-money options.
But the skew also holds valuable information. An investor who takes the time
and effort to carefully analyze the skew of a stock’s options can gain
important insights into how the market is pricing risk. In some cases, for
example, the perceived downside risk may be greater than the perceived upside
risk, which causes the graph to be more of a ‘smirk’ than a ‘smile’.
What does the term "delta" mean?
A measure of the rate of change in an option's theoretical value for a
one-unit change in the price of the underlying stock.
For example if the delta of a call option is 50 (or .50 to be more precise),
for each one point move in the stock, the anticipated movement of the option
would be a half point -- or 50%.
(The delta would be described in negative percentages for puts as the movement
is opposite.)
Is there an easy way to determine the first three characters of an options
contract?
There is no easy way for determining options root symbols, so let me give
you some general guidelines. For NYSE stocks, the options root and the stock
root are usually the same. For example, IBM options begin with IBM, and T
options begin with T. Options roots, however, can never have more than three
letters. So options root symbols for NASDAQ stocks are different than the
stock symbols. Microsoft, for example, has the symbol MSFT for the stock and MSQ for the root options symbol. And Intel has INTC for the stock and INQ for
the options.
The last two letters after the options root symbol indicate (1) the options
type and expiration month and (2) the strike price.
One complication is that when a stock's price range is greater than $100, then
the option root symbol has to change for every $100. Otherwise, the 105, 205
and 305 calls would have the same symbols, and that obviously cannot happen.
Another complication, as you pointed out, is that the same strike-price
options sometimes have different root symbols. This typically occurs when
there are 3-for-2 or other "non-even" stock splits. When these splits occur,
there are "non-standard" options in addition to "standard" options. For
standard options contracts, 100 shares typically underlie the contract, and
non-standard options will have some other quantity. If a $60 stock splits
3-for-2, for example, then, after the split, there would be standard $40
options covering 100 shares and non-standard options covering 150 shares. To
distinguish between them they each have their own root symbol.
If you are considering trading options on a particular stock for the first
time, you can get the ticker symbol from a reliable options quote vendor
or contact an Options Industry Services representative at 1-888-OPTIONS
(678-4667), Monday - Friday, 7:30 a.m. - 5:00 p.m. CST. That way you will
know, for sure, that you have the correct symbol. With a little practice, it
will all become clear.
- 0 - 25 strikes will be added in 2˝ point intervals
- 30 - 200 strikes will be added in 5 point intervals
- 200+ strikes will be added in 10 point intervals
Quite often strike prices are adjusted due to stock splits. So, if you notice
a 27˝ point strike, it is generally the result of a stock split.
What is meant by "rolling an
option"?
In the options market, "rolling" is a trading event where the options
trader simultaneously closes out one option position and establishes a new,
similar option position, usually with a different expiration (a.k.a. "rolling
out"), strike price (a.k.a. "rolling up") or both. Options traders can: "roll
up" or "roll down" in strike price, or "roll out" or "roll in" to different
expiration months.
This book describes just about every
fundamental strategy you could try with options. It covers the total return
concept of covered call writing, the pros and cons of option buying, examines
various types of spreads (vertical, calendar, and diagonal) and the various
delta (price) neutral strategies. If you have to have only one book on options,
this will be it.
Spend less than you earn! People who spend every penny
they make usually end up going broke.......
Take enough risk on the money you save! Playing safe by
putting your money under the mattress or in a savings account
will not make you wealthy..
Remember that.....Fully one-fifth of humanity, some 1.3 billion people,
struggles to survive on less than $1 per day. About 40% of
humanity survives on less than $2 per day. More than a billion
people around the world will go to bed hungry tonight. Life
expectancy in some 32 countries is less than 40 years. If you
have a few extra dollars in your pocket (you don't have to be a
millionaire to make a difference), please share some of your
financial good fortune with others who are in great need.
Think About It... Being in the 'now' brings a freedom, unlike living
in the past or in the future, which is a kind of imprisonment.
This isn't a kind of a denial where you pretend life doesn't have
problems. Life is full of problems, but most of those stresses
and failures are reliving old hurts or worrying about future
concerns. -- Carl Honore
When you 're diagnosed with cancer, you start to
bargain with God: "Let me get through this, and I'll take better
care of myself. I'll get my priorities in order. I'll learn to
live every day to the fullest." Isn't it sad that you have to get
sick before giving yourself permission to live life to the
fullest? -- Robert Schimmel
Look at Life in different & Positive ways
