I SPY a trend
Occasionally, I will look at options on popular ETFs to gauge changes in market sentiment. I feel SPY S&P 500 SPDRs has sufficent trading volume to get a read through on the broader market.
I like to look at the ratio of calls to puts in terms of both volume and open interest. In this last week for instance, I reviewed SPY 57-169 Oct call and put contracts. The ratio of call to put volume changed from 64 calls for every 100 puts on 10/5 @ 1pm to 40 calls for every 100 puts on 10/12 @ 4 pm. This is a 37.5% decrease in the call/put volume ratio in 6 trading days. Open interest went from 49 calls per 100 puts on 10/5 to 46 calls per 100 puts on 10/12. This represents a 6.12% decrease in call/put open interest ratio over the 6 day time frame. SPY has gone from 114 from 122 or 5.5% higher in these same 6 trading sessions.
How can these changes in the call/put ratios be explained? Some of the higher put volume could be put writers looking to make income from the rally, however many options players are likely buying greater put protection to hedge against a pullback. Others still may be reducing profitable call positions. All of these actions can lead to lower call to put volume ratios and open interest ratios
You may be able to get more meaningful data by picking specific option strike prices to analyze, but I think these ratios are a nice broad gauge of how options players are positioning themselves long/short over time.