Options Activity Tell

im not really an options guy but this sounds interesting. is it just a measure of market activity or something more?


It is interesting, Igor. However, I get confused by reading the sentiment behind put vs. call activity. The way I see it, one person’s call is a long exposure, while the other person’s call is a short exposure. For all the people buying calls, there are those taking the other end, selling the call and collecting premium on their ​bearish outlook. With IV elevated lately, option investors are looking to be sellers of options to gain their exposure. Seems to me that more call activity, given that perspective, would actually be bearish. I wish this artical had more information as to what exactly they are measuring.

Anyone else have a different perspective on put vs call activity?

Agreed, KMD. This article is just another variant of put/call ratios, which are mostly B.S. You can synthetically create any bullish or bearish strategy with combinations of calls, puts, and the underlying, so to say that more puts are trading vs. calls doesn’t necessarily mean anything. I get the basic rationale that people use for these ratios, but I’ve never seen any professional trader actually care. Additionally, most of the volume is going to come from larger traders who actually do position themselves outside of the traditional 'buy a put if you’re bearish, buy a call…" ways that would conceptually make P/C ratios make more sense.

I would think the sum total of open interest on puts and calls might still tell you something useful. The question is whether enough people are trying to exploit that info that its advantage has been competed away. Yes, for every buyer there is a seller, but a lot of options are just created by market makers who feel comfortable with some kind of dynamic hedging to collect a premium. Ultimately, the number of options written maybe tells you more than the number that have been sold (subtle distinction between writing, which creates a new option, vs selling, which simply transfers ownership of existing options).

For example, I might put a strangle on, which is neither bullish nor bearish, but would either be a call-plus-a-put, or a call-plus-a-short-call, or a short-put-plus-a-short-put. There are different combinations to put on this strategy, but both net out to zero (the strike prices presumably have some intervening effect - I’d have to think about that in more detail).

The other thing to consider is that buying a call is a bullish move, but selling a call is simply non-bullish – it is not necessarily bearish. So that does suggest that even though there is a buyer and a seller on each side of the trade, that does not mean that the seller’s non-bearishness cancels out the buyer’s bullishness.

My reaction to this was twofold:

  1. where does the complete option data come from, how much did it cost to get that data, how far back does it go, and is that length of time representative enough to use going forward.

  2. this seems like a strategy that would have been tried long before the recent past. I’m not so much surprised that it works and more surprised that any useful info hasn’t been competed away.

“Mr. Rafter calculates turnover by looking at the number of days one has to go back in time for the amount of new positions to reach or exceed the number of contracts outstanding. By subtracting the holding time of calls from the holding time of puts, he lands on a value that turns positive when calls are getting churned more often and negative when puts are heavily updated.”

I’m not if I fully understand this, but it appears that for each individual option, it would go like this:

Current OI: 50 contracts

T-1: 30

T-2: 40 -> the amount of new positions to reach or exceed the number of contracts outstanding. 20 existed previous day, 20 more today

T-3: 20

Not sure if it’s too early in the AM or not, but I don’t get how that tells you anything.

For your strangle example, you will not necessarily end up net neutral. (also I’ll assume you’re combining those trades with stock as well to create a synthetic. each of those aren’t strangles, but either way…) If I sell a put and buy a put, assuming I didn’t have an existing position, I would be creating additional open interest on the put side by 2 contracts. Like your example that could be neutral, the OI doesn’t mean anything.

For dynamic hedging, I wonder if the effect might actually be opposite of the general sentiment from P/C ratios. Example: investors buy a bunch of calls from market maker (bullish). market maker is going to hedge delta by selling futures (bearish). Only the futures have a direct impact on price of the underlying. Either way though, I think most of this is going to be more weighted towards correlation vs causation.

Maybe there is a predictive relationship between put/call turnover and market direction. However, that chart the guy showed looks kind of random to me…