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.
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