Many indicators gauge market and investor sentiment; but few are as robust as they possibly could be. Most of the indicators look at the balance of trades on order books, and some look at put-call ratios in the options market; but, most of them gauge a ratio or number without any context as to the actual intention of the trader. The indicator tested for this research has sought to more accurately explain the ratio of buys and sells in the options market of the underlying index. This indicator has proven to show tendencies for price activity of the Euro to go above or below key price levels, depending on up or down consensus measured in the options market.
One major indicator, the traditional put-call ratio, simply sums up and calculates all of the puts and all of the calls as a ratio. This has been criticized for being too crude of a method for gauging market sentiment, since the summation of the open interest is assumed to be long only. Assuming all the options are bought to open—a lot of them could be sold to open—results in a different sentiment entirely. A put-call ratio of 0.75 means the options market is bullish on the underlying stock, but this isn’t necessarily true. If, fo…
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