The put/call ratio is frequently misleading because:
1) it doesn’t take into account the price of the option being traded (i.e. total dollars risked)
2) it doesn’t take into account if the option trade is an opening (buying) or closing (selling) trade
Our proprietary option algorithm does focus on both of those telling variables. The algorithm also ignores everything in between the bid and ask, and ignores straddles, buy writes, and spreads. Trades occurring at or above the ask (most likely buying/opening trades) carry much more weight in the algorithm than trades occurring at or below the bid (most likely selling/closing trades). The dollar amounts are then kept as a running total every 15 minutes of the trading day. We also factor in the news of the day, and the setup of the daily chart.
Look at the 5 minute chart of HUYA and the running totals of options activity from our algorithm (all times PST) below.
HUYA opened flat and traded down the first 20 minutes. But look at the options activity the first 15 minutes (zone 6c). Call buying trumped put buying $280,825 to $-12,000. We made two early buys with a $32.48 average, and the stock exploded higher shortly after on even heavier call buying. We ended the day with a $1,787 profit, $1,170 of it from the HUYA trade. We also had profitable trades off our proprietary options algorithm in IQ, KBH, and FSLR.
If you aren’t following what the big money is doing, you are trading blind. To get our trades in real time off our proprietary options activity algorithm, we offer a free 7 day trial membership.