Equity Options Trading as a Market Direction Indicator

SPONSOR:
The trend is your friend! Click here to see the Top 50 Trending Stocks.





$CPCE (CBOE Options Trading Equity Put/Call Ratio)

For determining market direction, $CPCE equity options index is a bit more advanced but an interesting indicator of market sentiment. The put/call ratio reveals the overall selling to buying sentiment by dividing the number of equity put options (short) to equity call options (long) being purchased and plots the resulting figures in a line in the daily chart example below.


You might think, the example above doesn’t do much for me and what does options trading have to do with market trends. However, with the placement of a few lines that indicate extreme sentiments this becomes a valuable contrarian indicator.


Contrarian Indicator

In the example below, the S&P 500 is lined up with the $CPCE so you can see how the $CPCE stacks up as a contrarian indicator. The abnormal spikes crossing over the top and bottom lines in the $CPCE part of the chart frequently correlate to near-term reversals of the market trend.


I've added the green dots on the $CPCE chart to point out higher than normal spikes in put option buying and a possible signal to go long in the market in the near future. Four out of the five green dots resulted an immediate, short-term reversal to the up side.

The red dots along the lower line point out lower put to call option buying or a larger amount of call options (long) being purchased and two out of three red dots resulted in a near-term downward reversal.

Like many things in stock trading, the equity options trading $CPCE index is not 100% accurate, and having the ability to read other indicators along with it will help to give you a broader perspective on market direction. For instance, consider Japanese Candlesticks, ADX, moving average crossovers or another indicator that you feel comfortable with and is applicable.

Having said that, the $CPCE as a contrarian indicator has a high percentage of probability in predicting a short-term trend.

If you're comfortable determining market trend you can move on to the next step in a stock trading system, finding good stock candidates.

Or, if you'd like to continue to improve your understanding of how to recognize stock market trend, just click here.


Return from Equity Options Trading to Online Stock Trading Home.





NEW!
Who wants a peek at DOW Jones Industrial Stocks that're beginning to trend?
Click HERE!

Learn Trend Trading!


Search Stock Trading Warrior
...and pay only $4.95 per trade!

Stock Market Software

Would you be surprised to know that there's a product that filters through almost an unimaginable amount of stock price data to reveal which stocks are the most profitable during specific times of the year?

Read my review of TradeMiner.

Free Subscription

Subscribe to the
Stock Trading Warrior's eZine Featuring:
  • Simple and proven strategies
    for stock trading success
  • Step-by-step and easy to understand methods
  • Increase your ability to earn gains on your investments

SUBSCRIBE to the STW NEWSLETTER

Stock Trading eBook

The Stock Trading
Warrior's Guide to...

ebook
All Stock Trading Warriors need a strong strategy in their arsenal - Find out more about what's inside this stock market trading ebook.

Free Videos

For a free market update:

Watch Todays 1pm Market Update
Presented by 30year Market Veteran Adam Hewison

What really makes a stock price rise? To find out watch:

What Makes a Stock Go Up?


Stock Market Insights


How a Simple Line Can Improve Your Trading Success

"How to draw a trendline" is one of the first things people learn when they study technical analysis. Typically, they quickly move on to more advanced topics and too often discard this simplest of all technical tools. Read more...

Is a Stock You Own in
a Trend?...
Find Out Now!

Online Stock Brokers

Find out why a discount broker can make a difference in the bottom line of your investing performance.

Read the online brokerage discussion...