Looking at some of Schaeffer’s commonly used options indicators
At Schaeffer’s, we use a variety of indicators in our writing to describe stock and trader behavior. While some of these terms may seem confusing at first, they’re actually easy to understand — and can offer valuable insight for options traders. Below, we’ll break down a few of the most common terms you’ll see in our coverage at SchaeffersResearch.com.
One of our go-to data points is option volume ratios, derived from information we receive from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). We track the number of puts and calls bought to open across these exchanges and express them as ratios. For example, we might say, “XYZ’s 10-day call/put volume ratio at the ISE, CBOE, and PHLX is 2.50.” This means that for every XYZ put that’s been bought to open during the specified time frame (10 sessions, in this case), 2.50 calls have been bought to open.
Since, based on the above information, long call volume has easily outweighed long put volume, it’d be easy to say that XYZ speculators have been extremely bullish (since they’ve bought to open more calls) during the past 10 days. However, we like to see how that ratio stacks up against XYZ traders’ previous behavior, so we compare it to all other 10-day ratios from the previous year. Therefore, using our hypothetical 10-day ISE/CBOE/PHLX call/put volume ratio of 2.50, we could say something like, “This ratio lands in the 95th percentile of its annual range.”
If you’ve ever taken a standardized test, this percentile terminology should feel familiar. A 95th percentile rank indicates an unusually high — and likely bullish — level of call buying relative to the past year.
Another favorite metric is the Schaeffer’s put/call open interest ratio (SOIR). Unlike volume ratios, which focus on buy-to-open activity, the SOIR includes all open interest — whether bought or sold. It specifically looks at options expiring within the next three months, helping us gauge the sentiment of short-term traders. Like volume ratios, we use percentile ranks to show how skewed the current setup is toward calls or puts.
The last indicator we’ll highlight here is the Schaeffer’s Volatility Index, or SVI, which can be particularly useful during earnings season. In the simplest terms, SVI essentially tells us if traders are overpaying or underpaying for a stock’s front-month options, from a historical perspective. The SVI averages the implied volatility of front-month options that are at the money. Then, by using a percentile rank, we can determine if those options are seemingly cheap or expensive, from a volatility perspective. So, if you hear us say that “XYZ’s SVI of 49% ranks in the 95th annual percentile,” you may want to put your money elsewhere, as volatility expectations are historically high.
To get real-time options updates using these and other indicators, follow @Schaeffer’s on Twitter.