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The only problem with an indicator of that nature is you can't make the claim,
anymore, that option volume is a true contrary indicator. It comes back to the
fact that most of the volume today is not a straight bullish or bearish bet.
the contrarian view also used to exist from the view that 90% of options go off
worthless....and that has never been true.
Here is the dilema.....let's say a customer buys a put to protect a long stock
position. That put purchase results in the creation, by the customer, of what is
effectively a call option....Stock + Put = Call(I'm leaving out the carry).
Years ago this use of options was rare....people bought puts when they were
bearish.....very little hedge trading actually occurred. Today most of the
trading is hedge trading and the floor volume is dominated by spread trading.
This makes it very difficult to draw a clear picture from volume alone. If you
add open interest this doesn't necessarily clear the picture because the actual
calculation for Open Interest also clouds the intention of the user and the floor
community cannot in and of itself create open interest. Having said all that it
just simply isn't easy to use the data to draw a "clear" conclusion.
Now add volatility to volume and OI and for a while that actually worked very,
very well. Guess what..volatility numbers are now bizarre(my term). So many
issues have an implied of over 100%. In reality, although I can model a vol. of
anything, a value of over 100% is a practical impossibility. It more likely
describes an expected price distribution would DOES NOT LEND ITSELF to option
modeling. The hi vol. numbers really seem to imply a dealer community wanting to
create "values" at which they can survive given that THEY MUST trade.
znmeb@xxxxxxxxxxxx wrote:
> [Quoth the THE DOCTOR:]
> >
> > The percentage of options going off-line as closing trades has been a bit
> > higher month to date....this would allow one to conclude that a good portion
> > of these users have in fact been successful. Drawing a conclusion as to
> > "were they lucky or smart" is impossible. I'm anxious to see what
> > expiration week activity looks like. At this point if the market stays up I
> > would venture a very low percentage of options will go off worthless. At
> > the point I wouldn't be too surprised to see the number in the mid 20%
> > area...which would be a remarkably low value.
>
> I was trying to inspire creation of an indicator :-). One of the classics
> in stock analysis is the specialist short sales ratio, which is the
> ratio of short sales by specialists to those of the general public or
> something like that. The theory is that the specialists short when the
> market is about to go down, being "smart money", and the public has no
> clue so they short when the market is about to go up. That was the
> original motivation behind using a put/call ratio as a contrary
> indicator. Put buying was supposed to be "stupid money" and call buying
> "smart money".
> --
> znmeb@xxxxxxxxxxxx (M. Edward Borasky) http://www.teleport.com/~znmeb
>
> If God had meant carrots to be eaten cooked, He would have given rabbits
> fire.
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