Trader’s Narrative

The International Securities Exchange is a relative newcomer to the options market. It offers an all electronic market and has used the leverage of technology to alter the landscape of options trading. The ISE offers one of the most most level playing fields for retail traders. With a growing amount of trading volume the ISE has become an alternative source of options sentiment data.

Most are familiar with the CBOE put/call ratio. But the ISE’s sentiment index is a little bit different. Here’s their own explanation:

“The ISE Sentiment Index (ISEE) is designed to show how investors view stock prices. The ISEE only measures opening long customer transactions on ISE. Transactions made by market makers and firms are not included in ISEE because they are not considered representative of market sentiment due to the often specialized nature of those transactions. Customer transactions, meanwhile, are often thought to best represent market sentiment because customers, which include individual investors, often buy call and put options to express their sentiment toward a particular stock.”

Instead of dividing puts by calls and showing the results as a number, like, say 1.0045, the ISEE shows the number of calls traded for every 100 puts. So when you have a number less than 100, it means that more traders have opened long put options than long call options.

Because the ISEE excludes market makers, and because it only shows opening positions, it presents a fairly accurate measure of sentiment.

During the last intermediate market bottom, there were 3 days where we saw very pessimistic readings on the ISEE. On March 8th 2007, there were 58 calls traded for 100 puts. And on the day before and day after, the ISEE also showed very low readings:

In fact, the reading we saw in March was the lowest in the history of the ISEE (see table below). By contrast, last week, we saw a fairly low reading of 74. But it wasn’t even close to the previous market low. Here are the lowest 20 readings of the ISEE. Also, I’ve included the top 10 daily decreases and increases in daily ISEE readings: