ISE Sentiment Index (ISEE) is one of the most technical indicators
for stock market and ETF trading. It calculates ratio of call option volume to
put option volume to detect market sentiment (bullishness or bearishness). It
is only applied to retail investors. It is a contrarian indicator.
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 in an attempt to comprehend the market sentiment. This assists traders
with making wise decisions. An eye-catching technical indicator, ISE Sentiment
Index (ISEE) is considered highly effective, and is therefore very
popular.
The ISE Sentiment Index is calculated as the ratio
of call option volume to put option volume, and is normalized by multiplying
100.
This quantitative measurement filters out the
transactions made by market makers and financial institution firms that are
involved in hedging, asset protection or other elaborate schemes instead of
pure speculation.
Please keep in mind that 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 call and put
transaction amounts made by retail investors, such as individual investors,
money managers and hedge funds managers. Therefore, retail investors’
transaction patterns and behavior are 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 short-term trading opportunities,
even if the current ISEE levels are much lower than those prior to the
financial meltdown. Occasionally, the ISEE has shot up very high.
Please note, if the ISEE reaches extremes, it usually signals a
reversal point in the market or price. It may not be imminent, but it usually
takes place within a few days of the indication.
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 if 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 keenly watching the options trading level. It’s not totally
clear what percentage of retail investors are aware of the ISEE indicator. The money
makers can utilize the ISEE as a weapon to attack the retail investors and skim
profits. One has to be daring to tangle with the retail investors.
In our understanding, usually the market movement is mainly
determined by the internal market strengths or weaknesses. The news or economic
reports are most often used as an excuse. For example, in the vigorous bull
markets, the bad news often will turn into good news.
If you closely watch the market, you will discover the following
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 turn
a quick profit.
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