• BREAKING NEWS: Stocks Extend Rally Ahead of Interest Rate Decision
 
SIR Logo
  • About Us
    • Who We Are
    • About Bernie Schaeffer
    • Our Newsroom
    • FAQ
    • Contact Us
    • Corrections
    • Ethics & Fact Checks Policy
  • Market News
    • Sign Up for Free Market Newsletters
    • Opening View
    • Midday Market Check
    • Market Recap
    • View All Free Subscriptions
    • Schaeffer's Volatility Scorecard
    • Featured Publication
    • From the Top
    • Monday Morning Outlook
    • Indicator of the Week
    • Editor's Picks
    • View All
    • Trading Analysis
    • Best & Worst Stocks
    • Earnings Preview
    • Investor Sentiment
    • Quantitative Analysis
    • Technical Analysis
    • VIX & Volatility
    • View All
    • Stock Options
    • Intraday Options Activity
    • Most Active Options
    • Trade Postmortems
    • Options Recommendations
    • View All
    • Trading Education
    • Strategies & Concepts
    • Expectational Analysis
    • View All
    • Market News
    • Buzz Stocks
    • Stocks on the Move
    • Analyst Update
    • 5 Minute Market Rundown
    • Stock Market Podcasts
    • View All
    • Daily Market Newsletters
    • Opening View
    • Midday Market Check
    • Market Recap
    • View All
  • Premium
    • All Trading Services
    • Most Popular Services
    • Elite Trader
    • Quick-Hit Trader
    • Lightning Trader
    • Ultimate Trader
    • View All
    • Directional Trading
    • Options Under $5
    • Leverage
    • Weekly Options Trader
    • Event Trader
    • PowerTrend
    • Schaeffer's Players
    • Overnight Trader
    • View All
    • Advanced Trading Alerts
    • Wealthbuilder
    • Premium Trader
    • Hedge Hunter
    • Volatility Trader
    • Weekly Volatility Trader
    • View All
    • Weekend Alert
    • Weekend Player
    • Weekend Trader
    • Weekend Trader Alert
    • Expiration Week Countdown
    • Weekly Options Countdown
    • View All
    • Newsletter Trading Services
    • Master Portfolio
    • The Option Advisor
    • Schaeffer's Daily Bulletin
    • View All
    • Courses & Education
    • Getting Started with Options
    • View All
  • Options 101
  • Deals
    • Deal of the Week
    • Broker Center
    • Free Trial
  • Log-In
  • Search
>> PODCAST: tastylive's Jermal Chandler makes sense of the stock market<<

Option Volume and Put/Call Volume Ratios


Option Volume

Whether an option is bought or sold, whether it is a call or a put, when it trades on the exchange, it is considered volume. In short, option volume is the number of contracts traded in a security or an entire market during a specific time frame, usually one trading day. It is simply the amount of options that change hands from sellers to buyers as a measure of activity. If a buyer purchases 100 contracts from a seller or a market maker, then the volume for that period increases by 100 contracts based on that transaction.

Let's look at another example. Say Jim buys 100 calls for XYZ Inc. (XYZ) at the October 30 strike. On the same day, Bill buys 200 calls for the same strike and month. Total volume for XYZ's October 30 strike would then equal 300 contracts (100 calls + 200 calls = 300). This result would hold true regardless of whether the XYZ calls were bought or sold by either Jim or Bill. As you can see, option volume indicates the number of contracts traded at a particular strike for a particular option for a specified time frame.

Option volume is a useful tool for traders, as it can point out where traders are focusing their attention on an intraday basis. For instance, assume that XYZ Inc. reported strong earnings prior to the market open and opened higher when trading began. High call option volume could be the result of such an occurrence, as options traders try to take advantage of the underlying stock's move higher. Vice versa, a negative reaction to the same report could bring about a spike in put option volume. However, if you did not know that XYZ Inc. reported earnings, but saw the heavy option volume changing hands on the stock, you would know that options players were speculating on some event or move in the shares. As such, option volume can be an handy indicator for events (known or unknown) surrounding a particular stock.

Option Volume Doesn't Equal Open Interest

Keep in mind, however, that volume is not the same as open interest. Where open interest indicates the actual number of puts or calls in residence at a particular strike or for a particular period of options, volume is merely the number of contracts changing hands. Just because option volume spikes at a particular strike, does not mean that open interest will increase or decrease.

For example, let's return to the 300 calls that were traded on XYZ Inc.'s (XYZ) October 30 strike. Let's say that this particular strike already has open interest of 300 contracts. Without knowing whether or not this option volume was bought to open or sold to close, we do not know if open interest at XYZ's October 30 strike will increase or decrease, or if it will change at all. If the 300 calls were bought to open, then we could see open interest increase to 600 contracts. Meanwhile, if these 300 calls were sold to close, then we could see open interest decline to zero. Furthermore, if these 300 contracts were merely changing ownership, we could see no change in open interest at all.

The Put/Call Volume Ratio

Combining put and call option volume, we can arrive at another useful indicator in gauging sentiment, the put/call volume ratio. To arrive at this figure, the put volume is divided by call volume. Such ratios are calculated on individual stocks, indices, or the overall market. Near market lows, the put/call ratio will rise as options traders become excessively worried about downside risk and seek to hedge their portfolios or speculate on further downside activity with puts. Near market peaks, interest in calls heats up to form a low put/call ratio. The put/call ratio is thus a contrary indicator when it reaches extreme highs or lows.

Looking at our example on XYZ Inc., we have call volume of 300 contacts at the stock's October 30 strike. Should put volume at the same strike arrive at 100 contracts, the resulting put/call ratio would be 0.33 (100 put contracts / 300 call contracts = 0.33). The closer this ratio moves to 1.0, the more put contracts are being traded relative to calls. As such, a put/call ratio greater than a reading of 1.0 indicates that traders are favoring bearishly oriented puts over calls in greater numbers. Such a development can be seen as a contrarian indicator of excessive pessimism, and can hint at a potential bottom, or rebound, in the underlying stock or index. The inverse can also be seen as a contrarian indicator for a potential top, or roll over, in the underlying stock or index.

0

0

0

Partnercenter


 

About Schaeffer's
Who We Are
More about Bernie
Business Hours
Schaeffer's Sitemap
How Can We Help?
Access Your Account
Contact Us
Privacy Policy
Legal Notices
Premium Products
Trading Services
Educational Programs
Deal of the Week
Free Market Newsletters
Let's get social:
Twitter logo Facebook logo Instagram logo YouTube logo Linkedin logo
© 2021 Schaeffer's Investment Research, Inc.
5151 Pfeiffer Road, Suite 450, Cincinnati, OH 45242
All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.