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Just a brief observation about what has traditionally been an
outstanding short term indicator and has been working VERY VERY well
lately.
Two of the countries largest brokerage houses Merrill and Smith Barney
calculate an "in house" put/call ratio. Schwab is in the process of
developing one as well, but the program is still under development.
In essence the In House number looks at the number of opening buys in
calls and compares it to opening buys in puts. The NORMAL ratio in a
retail system is usually about 3 to 1 in equities. When it approaches 5
to 1 that is traditionally an good time to get some some put premium.
On the other side a reading of 1 to 1 is a good time to get bullish.
The clear benefit of using "pure" retail data is that all the arb
activity....which is the lion's share of option trading....doesn't
distort the p/c numbers.
If you use the raw data, like that generated by OCC or CBOE, you have
data that includes floor and institutional hedging activity..you also
don't have the ability to distinguish between opening and closing
trades. Open and close data is not collected from floor trades. The
problem then is huge distortion by "non directional" floor arb trading.
The other concern is finding someone at Merrill or Smith Barney to get
the data. There is the benefit that because it is retail..the
assumption is that most of is pure directional trading. Also retail
open interest is also a "purer" number. The general problem with
"gross" open interest is that opening trades are all treated the same
and closing are all treated the same.
I suspect/hope that when Schwab completes it's work(and hopefully
they'll chose to complete the project)they will choose to post it on the
web site in addition to making it available internally.
Have a good week trading!
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