Hello
Welcome to Tiger Academy - 「Practical Operation with the App」episode 3.
In this issue, Tiger Academy will guide everyone on how to analyze the future trend of options using the app.
Our app primarily utilizes three indicators for options analysis: Call/Put ratio, Volatility curve, and Turnover ratio. These indicators aid in making investment decisions. To access these three indicators, users need to click on the "Options Analysis" button next to the options chain.
How do we analyze these three indicators?
1. Call/Put ratio
Let's start with the first indicator, the Call/Put ratio. This indicator is used to analyze market sentiment. It is calculated by dividing the number of contracts for call options by the number of contracts for put options. If the ratio is greater than 1, it indicates that the bullish forces are stronger than the bearish forces. A higher ratio suggests a stronger optimistic sentiment for upward movement, while a lower ratio indicates weaker bullish sentiment.
For instance, in the chart up top, Apple Inc.'s Call/Put ratio kept going up and down from Feb 13 to May 11. This means the market's bullish feelings were getting weaker. But after May 11, the ratio started shooting up quickly, showing a shift from weaker bullish sentiment to strong bullish sentiment.
But only looking at the Call/Put ratio to make investment choices might not be enough for two reasons:
Sometimes a high Call/Put ratio could mean an overbought market and things might reverse. So you have to consider how the trend's actually going along with the ratio.
Different options contracts have different prices and strike prices. Just adding up the number of calls and puts doesn't show how bullish or bearish sentiment is for options at different strike prices.
So you really need to check out the volatility curve too when making decisions.
2. Volatility curve
Under the Call/Put ratio, Tiger Trade shows the volatility curve for call and put options expiring on different dates. The horizontal axis is the strike price, and the vertical axis implies volatility. So what does this tool mean?
The volatility curve charts the implied volatility of options at different strike prices but expiring on the same date. It helps spot how implied volatility changes for options at different strike prices.
Usually, the volatility curve slopes down to the right like a smile. It shows the implied volatility of options at different strike prices but expiring on the same date.
For instance, the volatility curve for Apple options expiring May 12, 2023, is in the chart. Each point on the curve is the implied volatility (up and down axis) of options at different strike prices (left and right axis). The lowest implied volatility matches the strike price of the stock's current market price. This means that at-the-money options have the lowest implied volatility.
When checking the volatility curve, focus on its shape. If people expect bearishness ahead, how should you read the volatility curve? In that case, see if the volatility curve leans left or right. If it leans left, options with lower strike prices have higher implied volatility. Then in-the-money call options and out-of-the-money put options are more popular.
But compared to a right-leaning curve, it means investors aren't too bullish. If you follow trends, look for chances to go long. On the other hand, if the curve leans right, it shows investors are more bullish.
If you follow trends, find chances to go short. You also have to consider volume. Often the volume of options contracts shows market sentiment. The "Analytic" feature provides the turnover ratio, a key tool.
3. Turnover ratio
The turnover ratio is the percentage of trading volume and open contracts for a stock each trading day. The line in the chart shows the ratio of trading volume to unclosed contracts, while the volume bars show unclosed contracts.
How should investors check out this tool? Looking at the turnover ratio lets you get a feel for how active the market is and how sentiment is doing. A higher turnover ratio points to more market action and maybe stronger sentiment. On the other hand, a lower turnover ratio could mean not much trading and weaker sentiment.
Analyzing the turnover ratio gives you a peek into how the market is moving and how investors are behaving.
Let's look at two scenarios based on volume and unclosed contracts:
When the turnover ratio and unclosed contracts both go up, it means either bulls or bears are heavily buying options. This hints the market could trend hard one way in the future, which could further impact option prices.
When the turnover ratio rises but unclosed contracts stay the same or even drop, it shows options being actively bought and sold with high turnover. This means both bulls and bears are actively competing, making the future trend uncertain. In this case, it's best to be careful and keep watching.
Considering changes in volume, unclosed contracts, and turnover ratio lets investors get insight into market sentiment, potential trends, and overall options market action. These things can help guide choices and strategies for options trading.
Comments