How to Use the ISEE to Detect the Market Reversal by Example

The ISE Sentiment Index (ISEE) is calculated as the ratio of call option volume to put option volume, and is normalized by multiplying 100. 

provides free daily data of the ISEE, which are gauged on 1,700 plus securities that trade options on ISE.  The historical data for the ISEE is available on ISE website as well. The ISEE Index for All Securities was accessible starting in April 2002. On the other hand, the other two ISEE indices Equities only and Indices, &  ETFs only
tracked back to January, 2006.   

Technically speaking, investors buy call options to anticipate the rise of underlying stocks or indices. Likewise, investors buy put options to gain profit when the price drops.  Basically, the ISEE reading just tells us the bullish bets against bearish bets.  Thus, the interpretation of the ISEE index is pretty straightforward. 

When the ISEE reaches around 100 which is trend line, the sentiment is treated as neutral status.  When the ISEE is above 100, for example 150, it means for every 100 units of put option orders are there are placed, and 150 units of call option orders are placed during the same time frame.  This case shows that investors are optimistic about the market.  The higher the ISEE reading, the more bullish the market sentiment is deemed to be. Conversely, measures below 100 signal pessimistic views from the retail investors.

The next chart shows on 9/17/2013, the ISEE reached 149 which was the highest reading in one month. Then market started going down on 9/19/2013 until today 10/3/2013. When the ISEE reached an extreme level, we should take cautious stand.

 

 

Please be mindful that the ISEE works as relative number instead of absolute number.

Thanks for your visiting and reading.

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