Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market
Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market. We use a variety of investor sentiment indicators as contrarian signals on the direction of the stock market. Largely because most investors, including so-called “expert” money managers and brokers, usually are wrong. One of the indicators we use is the Options Speculation Index. This indicator looks at put vs. call buying as a measure of trader sentiment about where the market is headed for the short term. As you can see from the chart below recent trading pushed the index to an excessively optimistic level of 1.3. This chart shows the traders opened up 30% more bullish contracts than bearish ones. And that is a signal for caution for the short term from a contrarian viewpoint. You can also see that this kind of level of excessive optimistic trading has not worked out well in terms of median returns and win rates.