StreeTools - Part 2

This is the second part of a series designed to show you how I use the sentiment tools that are available in the StreeTools section of our website.

In part one, we explored the "Market Summary" section and now we are moving on to the "Market Tools & Indicators" section. These are the links you would go to if you wanted to find out the sentiment on a specific stock. The first two links are both put/call ratios, but they measure different aspects. As their names imply, the Put/Call Open Interest Ratio measures open interest while the Put/Call Volume Ratio is based on volume.s

The Put/Call Open Interest Ratio (OIR)

The put/call open interest ratio is calculated using the first three calendar months of data. A rising OIR indicates that put open interest is building relative to call open interest. We generally interpret this as rising pessimism. A declining OIR indicates that call open interest is building relative to put open interest. We generally interpret this as rising optimism. A contrarian would view rising pessimism as potentially bullish and rising optimism as potentially bearish. I say "potentially" because you need to look at sentiment in relation to price action. If a stock was being driven into the dirt because of problems with their business model, you would expect to see some pessimism, so a rising OIR would not have the same implications as when a stock is strong.

Once again, I have removed the stock name so that we can focus on the educational aspect. The SOIR is the sentiment indicator that I use the most. In the screenshot above, I have highlighted what I look at. The green arrows focus on the SOIR and the stock price. Here you can see that the stock was in a sideways consolidation while the SOIR also moved sideways. Recently, however, the shares have begun to rally. What is interesting is the reaction of the put/call ratio, which has surged higher (a sign of pessimism.) I would interpret this is a bullish scenario.

In the first part of this series, we looked at the Sentiment Brief link and saw that you could get the current reading of the one-year percentile rank. Here you can get today's reading and a recent history (the table of data next to the charts). This number tells you how today's reading compares with the past year's worth of readings on a scale of zero to one hundred. The higher the number, the higher today's reading relative to the past year. In today's example, the reading of 100 percent indicates that this is one of the highest readings in the past year. Since the StreeTools SOIR chart only shows around three months worth of data, this can be a guide to the longer-term action. The percentile rank field is simply a way to quantify how today's reading relates to the past year's worth of data for that stock. It is important to note that it does not show in what direction the SOIR is moving so a SOIR chart is also extremely important.

Schaeffer's Put/Call Volume Ratio

Like the SOIR, the Put/Call Volume Ratio is a measure of sentiment. Here you are looking at the 21-day average call volume in relation to the 21-day average put volume. While open interest tends to build on itself, volume starts at zero each day so a one-month average is used to smooth the data.

Both the SOIR chart and the put/call volume ratio are of the same stock so that you can compare their action. In the volume put/call ratio chart, you can see that put volume has outpaced call volume, pushing the ratio higher. This confirms what we saw earlier in the SOIR chart. Puts have seen increased volume and it is translating into open interest, indicating that traders are opening new positions. I should note that it does not tell you whether these newly opened positions were regular buys or put writes, but that discussion is beyond the scope of today's commentary. Since you will never have perfect information, all you can do is make some assumptions based on experience. Many times you will find that the SOIR and volume charts match up and confirm each other. Could there be a situation where the SOIR and Put/Call Volume Ratio charts are moving opposite? Yes. Assuming calls are constant, if traders were liquidating put positions, the SOIR chart would move lower as put open interest decreased, but the put volume would cause the Put/Call Volume Ratio to move higher.

Front-Month Open Interest Configuration

The final link in the Trading Indicators section is Open Interest Configuration. This is simply a bar graph of how the open interest for front-month options is positioned. Blue bars represent calls and red bars represent puts. The scale on the left-hand side of the chart shows the number of option contracts. The scale along the bottom shows the strike price levels.

Here you can see that tallest blue bar is at 60. Since blue represents calls, this means that the 60-call strike has a little more than 16,000 contracts of open interest. The call strike with the largest amount of open interest is referred to as the "peak call strike" and the put strike with the largest amount of open interest is referred to as the "peak put strike". Using this terminology, we see that 55 is the peak put strike with a around 9,000 contracts of open interest.

A simplistic view would be that I assume large overhead call buildups (a.k.a. out-of-the-money calls) will act as resistance. On the flip side, I view a build-up of puts beneath the current price (a.k.a. out-of-the-money puts), as potential support. Another way of stating this is that I view large out-of-the-money open interest strikes as potential key points for the stock. If a stock is expected to stop at a key level and doesn't, I would have to view that as a sign of momentum, whether it be up or down.

I check the Front-Month Open Interest Configuration to see where the action is. If I am looking at a stock bullishly, I do not want to see calls building overhead. I would like to see puts being added below the stock. (If I am looking at a stock bearishly, I do not want to see puts building below. I would like to see calls being added above the stock.)

In the last part of this series, we will conclude by looking into some of the links under the Trading Filters section of the StreeTools page.