Evaluate Most Active Daily Options Trade Data [18 Sep 2023]
I was looking at how do we look at the most active daily options trade, and what can it tell us about the sentiment of traders and investors.
It is important to understand the difference between put and call options.
Call Options: These give the holder the right (but not the obligation) to buy an underlying asset (e.g., stocks) at a specified strike price before a certain expiration date. Call options are generally used when investors are bullish and expect the price of the underlying asset to rise.
Put Options: These give the holder the right (but not the obligation) to sell an underlying asset at a specified strike price before a certain expiration date. Put options are typically used when investors are bearish and anticipate the price of the underlying asset to fall.
Can this trend reading really help us in determining how equity is going to trade in the market later?
Daily Most Active Options (as of 18 Sep 2023 0930hrs SG)
When the percentage of call options is higher than put options in a stock, it suggests a bullish sentiment among traders and investors.
But we need to understand that it could lead to several implications and may lead to some possible outcome.
I shall filter the list and assess 3 stocks by the highest contracts, the highest %Calls and highest %Puts.
(Do let me know in the comments if you would like to see the rest of the list)
Top 3 Stocks With Highest Number of Contracts
As of 18 Sep 2023 10am (SG), $Tesla Motors(TSLA)$ has the highest number of contract of which 56.94% is on Calls and 43.06% is on Puts. That is a difference of 13.88%.
It is not among the biggest difference in Calls option and also not among the highest percentage of Calls option, it looks like investors have positive sentiment on Tesla and is expecting the share price to rise.
But there are more details we will need to look at if we were to determine for short term or long term, This is an overview of how the options has stacked up among top stocks.
Top 3 Stocks With Highest Percentage of Calls option
$Palantir Technologies Inc.(PLTR)$ came in with the highest percentage of calls option and also the biggest difference between calls and puts in term of percentage.
Does it mean that we will be seeing a rally in Palantir share price this week. I believe the volume in daily and contract also play a part, Palantir does not seem to have a very high option volume.
But we need to take note of these following outcomes.
Bullish Market Sentiment
A higher percentage of call options indicates that more traders and investors are betting on the price of the underlying asset (e.g., stocks, indices, commodities) to increase in the near future. This reflects a generally positive outlook on the market or the specific asset.
Rising Stock Prices
The demand for call options typically pushes up their prices, and this can contribute to an increase in the price of the underlying asset. As more investors buy call options, they may also buy shares of the asset itself, further driving up its price.
Higher call option activity can lead to increased market volatility. As traders rush to buy call options, there can be rapid price fluctuations in both the options and the underlying asset.
Potential Short Squeezes
In some cases, a high percentage of call options may lead to short squeezes. If a significant number of traders are shorting the stock (betting it will go down), and the stock price starts rising due to increased call option buying, short sellers may be forced to cover their positions by buying shares, further boosting the stock's price.
Positive News and Catalysts
A surge in call option buying may be associated with positive news, earnings reports, or other catalysts that encourage investors to take bullish positions. Traders often use call options to capitalize on expected price movements following such events.
While a high percentage of call options can signal optimism, it can also lead to concerns of overvaluation if the market becomes excessively bullish. This may result in a correction or reversal if the positive sentiment is not supported by fundamentals.
Some investors view a lopsided ratio of call options to put options as a contrarian indicator. In other words, when the market is overwhelmingly bullish, it may be a sign that sentiment has become excessively optimistic, and a correction could be on the horizon.
Top 3 Stocks With Highest Percentage of Puts option
After we have looked at Calls option, now we shall look at which stocks are having a higher percentage of Puts options in the total contracts.
$Nikola Corporation(NKLA)$ seem to have a pretty high difference of 35.78% in Puts compared to Calls, this would mean that traders and investors are not so bullish about this stock, which is a complete opposite to what we are seeing in Palantir.
But it is important we understand the outcome when this happen.
High Put-to-Call Ratio
When there is a higher percentage of put options being traded compared to call options, it suggests that more investors are betting on a decline in the price of the stock.
This could be driven by a variety of factors, such as economic concerns, geopolitical events, poor company performance, or negative market sentiment.
A high put-to-call ratio is often interpreted as a bearish sentiment in the market. It can signal that investors are nervous or concerned about potential downside risk, and they are buying put options as a way to protect their portfolios or profit from a decline in prices.
Impact on Prices
While a high put-to-call ratio can indicate bearish sentiment, it does not directly cause prices to fall. Instead, it reflects the collective outlook of market participants. If this sentiment persists and is supported by other fundamental or technical factors, it could lead to increased selling pressure in the market, potentially causing prices to decline.
Some traders use the put-to-call ratio as a contrarian indicator. In other words, when the ratio becomes extremely high (indicating extreme bearishness), it might signal a potential reversal in the market, as overly pessimistic sentiment can sometimes lead to buying opportunities.
High put-to-call ratios can also lead to increased volatility in the options market as traders may rush to buy or sell options in response to changing sentiment. This can create trading opportunities for those who thrive in volatile markets.
As I have shared an overview of how the options for stocks have stacked up, it is important to note that options trading is just one component of the overall market sentiment.
There are various factors can influence the supply and demand for options contracts. The specific implications of a high call-to-put ratio can vary depending on the broader economic and financial conditions, as well as the individual characteristics of the stock.
Therefore, while a high percentage of call options may provide insights into market sentiment, it should be considered alongside other factors when making investment decisions.
When the percentage of put options is higher than call options, it suggests a bearish sentiment in the market. However, it is important to consider other factors and indicators in conjunction with the put-to-call ratio to make informed trading decisions.
Sentiment alone does not guarantee market direction. We should analyze various data points to form a comprehensive view of the market.
Appreciate if you could share your thoughts in the comment section whether you think an overview of how the various stocks options have stacked would be a good start to evaluate the stocks performance and sentiment?
Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.
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