The International Securities Exchange (ISE) was
founded in 2000. It is a platform to
trade varieties of equity and index options.
Options
trading volumes and patterns have been analyzed to comprehend the market
sentiment which helps in making wise trading decisions for trading for many
years. An eye catching technical indicator ISE sentiment Index (ISEE) might be
the most popular and effective one in this area.
The
International Securities Exchange introduced the ISE Index in 2002. This index is to gauge retail investors’
sentiment in the market by measuring the ratio opening call options to opening
put options, which are placed orders on the International Stock Exchange
platform.
The
ISE Sentiment Index is calculated as the ratio of call option volume to put
option volume, and is normalized by multiplying 100. Here is the formula
ISEE=Opening Calls /Opening Puts x 100
This
quantitative measurement filters out the transactions made by market makers and
financial institution firms which are involved in hedging, asset protection, or
other elaborate schemes instead of pure speculation.
Please
keep in mind, the money makers and large institutions purchase put options in
order to protect a large amount of long positions, and reduce cost basis,
rather than take advantage of speculating on market movement.
According to Barron’s, the ISEE data focuses only on
calls and puts transaction amounts made by retail investors, such as individual
investors, money managers, and hedge funds managers, etc. Therefore, retail investors’ transaction
patterns and behavior is believed to be able to determine the market sentiment
from an expert’s view. This is due to the fact that the data is not significantly
skewed by a large quantity of options traders or money makers.
The ISEE can be used to detect the short-term
trading opportunity. Even if the current ISEE levels are much lower than those
prior to the financial meltdown.
Occasionally, the ISEE shot high.
Please note, if the ISEE reaches the extremes, it
usually signals a reversal point in the market or price. It may not be imminent, but it usually takes
place very soon within the next few days.
The market usually goes the opposite way of the ISEE
reading. We are not saying it works 100% of the time. However, if the reading
appears to be out of the box, it is definitely a red flag to watch, especially
when you combine this information with other indicators to find out the market
is in overbought territory.
Generally speaking, the bullish sentiment is often
accompanied by exuberance and greed. Bearish sentiment is coupled with fear and
regret. Often, both psychology and perception distract investors from
successful investment.
Sun Tzu said in The Art of War, “Only if you
know yourself and your opponents very well, can you win the battle.” Otherwise, you are like a turtle trapped in a
jar. On the other hand, the money makers and fund
managers are watching keenly the options trading level. It’s not totally clear
what percentage of retail investors are aware of this indicator ISEE. The money makers can
utilize the ISEE as a weapon to attack the retail investors and skim profits.
You have to be daring opposed to the retail investors.
In our understanding, usually the market movement
was mainly determined by the internal market strengths or weaknesses. The news
or economic reports are used as excuse most often. For example, in the vigorous bull markets,
the bad news often would be turned into good news.
If you closely watch the market, you will discover
from time to time, in a downturn market, if the call/put ratio is exceedingly
low, the short covering takes place intraday or at the end of day. If you are
an experienced momentum or short-term trader, this indicator can help you make
a quick profit.
Credited to: http://www.ise.com/market-data/isee-index/
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