Why are 'negative views by option players a positive for the market?' (December 15, 2001)
That was a line taken from Wednesday's market summary. To be more precise, it should have read 'negative views by options players as a whole are a positive for the market.' The reason is that options players as a whole are speculators. In other words, they buy out of the money near term (current month) options hoping to hit the home run. These are the most heavily traded options and they are thus the most volatile. The majority of option players are not investing, just trying to make a big score. Because they are speculators, they tend to load up on more options when they feel the market is certain to head in a specific direction. Problem is, just as with most areas of the market, speculators tend to get in late on moves; historically, when the put/call ratio closes above 1.0 (fear and anxiety) or below 0.4 (complacency), the market has been either ready to turn back up or topping. Thus, when option players get pessimistic about the market, that is a signal that things are either ready to change for selling to buying or a rally still has some legs under it. It is just a signal, however, as the put/call ratio is a secondary indicator to price and volume.
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