What is Net Options Sentiment?
Net Options Sentiment takes the Positive Options Sentiment and subtracts the Negative Options Sentiment. Positive Options Sentiment indicates a higher quantity / price of open call options. Negative Options Sentiment indicates a higher quantity / price of open put options. A call option is the right to buy the stock at a predetermined price. Buying a call is a bet the stock will go up. A put option is the right to sell the stock at a predetermined price. Buying a put is a bet the stock will go down. Skew is an important measure as well which subtracts the average price of call options above the current price from the average price of put options below the current price. See below to understand how skew would indicate the expected direction of the market.
IF (Average call price of contracts trading below 1.25 * current price) > (Average put price of contracts trading above .75 * current price) THEN the market is expecting price improvement
IF (Average call price of contracts trading below 1.25 * current price) < (Average put price of contracts trading above .75 * current price) THEN the market is expecting a price decrease
How to Use Net Options Sentiment
Net Options Sentiment is measured from 0 to 100. A high rating (80+) likely means sophisticated investors in the derivative markets are "bullish" (optimistic) about the stock going up. A lower rating (<20) means a "bearish" (pessimistic) market for the stock. In recent times more retail investors are buying options so a high Net Options Sentiment could indicate solely retail optimism. It is important to use other metrics such as high Net Institutional Flow, Upside Breakout or low Downside Breakout to help determine if this is the case. If retail is betting on the stock to go up and institutions are not, it becomes a much riskier metric to rely on.
High Net Options Sentiment + High Upside Breakout + High Net Institutional Flow + Low Downside Breakout = Great choice for a buy (short term or long term)
High Net Options Sentiment + Low Upside Breakout + Low Net Institutional Flow + High Downside Breakout = Risky investment
If the number is closer to 50, this is an indicator that the market is completely divided. As many people think the value will increase as those who think it will decrease.
Update Frequency and Usage for Net Options Sentiment
Net Options Sentiment updates every 3 minutes. This is one of the most important short term signals. It is a great signal to understand how the market views a stock in the short term and can fluctuate widely even in a single day. It is a fantastic tool to increase your success rate for entry and exit as you can be confident it is reflective of the current feelings of the market.