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Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market

Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market.  We use a variety of  investor sentiment indicators as contrarian signals on the direction of the stock market.  Largely because most investors, including so-called “expert” money managers and brokers, usually are wrong.  One of the indicators we use is the Options Speculation Index.  This indicator looks at put vs. call buying as a measure of trader sentiment about where the market is headed for the short term. As you can see from the chart below recent trading pushed the index to an excessively optimistic level of 1.3. This chart shows the traders opened up 30% more bullish contracts than bearish ones. And that is a signal for caution for the short term from a contrarian viewpoint. You can also see that this kind of level of excessive optimistic trading has not worked out well in terms of median returns and win rates.

Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market
Excessive Optimism By Options Traders is Negative Short-Term Signal for Stock Market

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Brad Lamensdorf

Brad Lamensdorf, the founder and portfolio manager of Active Alts, is a principal and co-manager of the AdvisorShares Ranger Equity Bear ETF. He previously managed a long-short investment partnership from 1998-2005 under the name Tarpon Capital Management. Earlier in his career Mr. Lamensdorf was an equity trader/market strategist for the Bass Brothers’ trading arm. He managed a short only portfolio in addition to co-managing a $1bil hedging program. He also served as in-house market strategist for the entire internal and external network of Bass Brothers money managers.

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