For example, how come the ratio of total puts and calls doesn't accurately inform of the stock's future movement?


A large volume of traded options and/or a large change in the open interest may be a tip off that something is afoot. Only other news would confirm that.

The ratio of total puts and calls does not accurately inform of the stock's future movement because you have no idea what the market bias of the buyers and sellers is. The Open Interest of a specific put might increase dramatically. Is the put buyer bullish? Or is it someone who bought a large bullish position in the underlying and is hedging it with those long puts which he hopes will expire worthless?

Or perhaps a Straddle buyer takes a large position in a low OI stock and it affects the P/C ratio.

A more complex possibility is that there is a large put seller (STO) as well as a large BTC buyer of a lot of the same series call (same strike and expiration) and the market maker is taking the other side of both trades (a Conversion). What do you make of the increase in put Open Interest then?

Now imagine that a variety of these situations are occurring all day (Conversions, Reversals, Spreads, Straddles, long and short buyers and sellers, and volume an Open Interest increase. Explain to me what the stock's price direction will be without looking deeper and figuring out which series increased and if possible, why?


First, what makes you think it does not? If there is a sudden (or not so sudden) change in the total puts and calls on a security, traders in that security would definitely notice and, potentially, react.

So when would they react? Equity traders have their eye on the options markets, futures markets, news events, changes in interest/discount rates, the limit order book, and many other things. If they see a big change in the options market, they would need to decide whether that change is driven by an action that actually provides new information or not. The fact that someone has taken a large position in the options market does not necessarily mean that person or institution has superior knowledge about the value or future trajectory of the stock.

Certainly equity prices can and have reacted to what is going on in the options market, but I suspect most of the time equity traders don't think those changes are informative, after taking into account all the other sources of information they are already looking at.

Remember, the vast majority of trades are made by computers that are watching all these things, so price and volume changes in both equity and options markets happen essentially simultaneously.

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