Why ISE Sentiment Index (ISEE) Only Measures Retail Investors’ Sentiment

The International Securities Exchange launched the ISE Sentiment Index (ISEE) in 2002.  This index is to gauge retail investors’ sentiment in the market by measuring the number of opening call options vs. 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.

Credited to: http://www.ise.com/market-data/isee-index/

If you want to know more about ISE Sentiment Index (ISE), you are welcome to read more:

http://top5indicators.blogspot.com/2013/09/how-to-interpret-ise-sentiment-index.html

http://top5indicators.blogspot.com/2013/09/how-to-combine-ise-sentiment-index-and.html

http://top5indicators.blogspot.com/2013/09/how-to-detect-market-reversals-by-ise.html

http://top5indicators.blogspot.com/2013/09/how-to-profit-from-stock-market-by.html

http://top5indicators.blogspot.com/2013/09/how-to-detect-short-term-market.html

http://top5indicators.blogspot.com/2013/09/how-money-makers-squeeze-retail.html

http://top5indicators.blogspot.com/2013/09/how-to-avoid-herd-moves-in-stock-market.html

Thanks for your visiting and reading.

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