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Steve,I have been watching a lot of commentary about the string of high put/call ratio data on the CBOE, but when I look at total option volume from The Options Clearing Corp. (OCC), I see that the CBOE Chicago Board of Options Exchange is the second platform behind ISE International Securities Exchange. In looking at the put/call for all markets, we have not had such significant levels of put-buying. In fact, looking at just open interest information, the put/call is at very low levels over the past 20 days. ... Is there the potential that the CBOE data is losing its relevance? Have you seen any commentary about the impact the ISE is having on viewing this type of data? Any thoughts that you may have would be appreciated. Regards,
Jon Erickson

No matter what data source you are using, the put/call ratio has been moving steadily higher over the last month. On nearly all counts, the 21-day moving average is at its highest level since last June.

That said, the reader raises some great points about the differences among various sources where the put/call ratio can be found, and which ones should be deemed most accurate. But first it might be helpful to look at this

past article on put/call readings, which looked at some ways to calculate and interpret these readings.

Before discussing the relevance of the CBOE

data and its merits relative to other sources, I'd like to share an abridged version of the 20-day table Erickson was kind enough to include in his email.

The table below provides a five-day comparison between the CBOE's put/call ratio and all-exchange data complied by the


The first thing you should notice is that CBOE's total put/call reading tends to run significantly higher than the OCC's total reading. But compare just the equity-only reading, and the variance contracts from a deviation of approximately 18% to one of less than 5%. (My numbers come from a random sample over a short time frame done with some back-of-the-envelope calculations, so don't take them as historically factual data.)

The obvious culprit for the overt discrepancy between the CBOE's total put/call reading and the OCC's reading is the fact that the CBOE's total includes index options, an area in which the CBOE still holds a dominant market share. As anyone who has followed these data know, the put/call on the index products has tended to run a full point higher than the equity-only reading for the last 18 months, and its inclusion in tallying up the CBOE's total is sure to push that figure higher. This is why, when I post intraday updates on the put/call readings in


Columnist Conversation, I always highlight the distinction between the two by reporting both the equity-only number and the ratio based on index products.

This leads to the question of accuracy and relevance of the CBOE, which I often rely on for intraday readings. Until recently, the

CBOE Web site was one of the few free places to find intraday updates (every 30 minutes) on total option volume and a nice breakdown between equity and index products. Some simple division is required to determine the

specific numbers for equity, index and a few ETF products. Despite no longer being the dominant player, it still offers enough data and a sufficient sample set to keep a daily pulse on the options market.


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ISE, which has become the market share leader for equity options, just started releasing its Investor Sentiment Index on an

hourly, intraday basis on Tuesday. Later I'll get to more details on the how, what and why this is a great addition to easily accessible information.

But this is where we need to become aware of the different inputs that produce the variety of readings and how important it is to know what tea leaves you're examining before drawing conclusions or interpretations. Although the CBOE's overall market share on equity options has dropped to 30%, it still holds a 70% market share on index option trading. The most prominent are the

S&P 500

(SPX) and the S&P 100 (OEX) index options. An additional quirk is that the CBOE includes the

Diamonds Trust

(DIA) - Get SPDR Dow Jones Industrial Average ETF Report

exchange-traded fund (ETF) options as part of its index product tally. It does not include other ETFs like the

Nasdaq 100 Trust

(QQQ) - Get PowerShares QQQ Trust Ser 1 Report

options as an index product.

All of the other exchanges and the OCC consider all ETF products as equity options. While I think that some broad market measures like the QQQs should be considered index options, the logic the OCC uses in drawing its dividing line is whether an option contract is cash settled (that makes it an index product) or if it is exercisable for shares. ETFs are exercisable for shares, which puts them in the equity category. For this reason, judgments over methodology aside, given that the CBOE controls some 70% of index option activity, I defer to its numbers for the put/call reading for index products.

Now back to the ISE, and how it keeps growing by understanding what users want, and offering new and improved variations on tried-and-true products. In this case, we are talking about the ISEE, or the ISE Investor Sentiment Index. The ISEE is calculated using only opening purchases, meaning volume that represents a closing transaction is excluded. By including only new opening positions or fresh bets and reducing the "volume noise" created by closing transactions, it should provide a better sentiment picture for that moment in time.

Also, the ISEE does not include trades that are done for a market-maker or broker/dealer account; only customer orders (which may include large institutional clients) are used in the calculation. Again, this should provide a clearer picture of what the public or retail investor is doing. This should also make it more effective as a contrary indicator, which operates under the theory that the masses are usually wrong.

A third difference between the ISEE and most other put/call readings is that it is actually calculated by dividing call volume by put volume, making it a call/put ratio, with the total multiplied by 100. I see no obvious advantages to flipping the equation on its head; just understand that the ISEE is the inverse of a typical put/call reading. A very low ISEE equates to bearishness while a high reading indicates a high degree of bullishness.

To provide some points of reference, note that the ISEE's most bullish reading over the last 52 weeks was when it finished at 304 on Jan. 20, 2004. That day, the CBOE's equity-only reading was 0.52 and the OCC's all-exchange equity-only put/call ratio was 0.59. The most bearish reading for the ISEE occurred on May 11, when the gauge dropped to 82. On that same day, the CBOE put/call was 0.93 and the OCC's all-exchange ratio produced a 0.89 reading.Given the ISE's dominant market share for equity options, its refinement in methodology to produce what I believe will be a superior measure of public sentiment and the fact that it has started making the ISEE data available intraday, I will probably start incorporating this information in any daily updates. But for now, the CBOE retains my loyalty to its index product reading. One day we'll get all together and then have so much less to talk about.

Other places to find intraday readings include brokers such as Merrill Lynch and OptionsXpress, both of which both produce put/call readings based strictly on their own customer account activity. This supposedly should provide a good view of what retail investors are doing.

One last thing to remember is that when the 800-pound QQQ gorilla moves, it can skew the reading no matter where you grab the data.

The bottom line is this: Make sure you know the where and how of the put/call reading you're getting, and whether it provides the best measure given your applications of these data.

Steven Smith writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He invites you to send your feedback to