Stock Market Trading
- Volume and open interest are important indicators in futures markets.
- Open interest is the number of open contracts of a given option. An open contract is either put or call that is not exercised, closed or expired. Each open transaction has a buyer and a seller, but for calculation of open interest, only one side of the contract is counted. Open interest increases when a buyer opens a put or call position and, vise versa, open interest decreases when a buyer sells/closes a put or call position.
- Call/Put Oscillator. This indicator is calculated by dividing the volume of call options by the weekly of put options. An indicator based on the concept that options traders are usually wrong near critical turning points. High readings are bearish, and low readings are bullish.
- A leading indicator of the sentiments is the call-put ratio. This indicator is calculated by dividing the volume of call options by the volume of put options.
A call option gives the holder a right to buy. If the number of call options are more than the number of put options, it indicates that more people are interested to own the stock. In other words, a call-put ratio of more than one indicates a bullish sentiment. The higher the ratio, more is the bullishness. A call-put ratio below 1 indicates a bearish sentiment. A call-put ratio of one indicates a neutral view prevalent in the market.
While the call-put ratio indicates sentiment, a look at the trend over a period of time can also be a good indicator. Even though the call/put ratios are greater than one over a period of time, it may not really indicate bullishness if it is falling over a period of time. Conversely, call-put ratios even if it is always less than one need not indicate bearishness if it is a rising trend. Other words call/put ratio is a market sentiment indicator not a trend confirmation indicator.
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