When gauging sentiment, we're primarily interested in the convictions displayed by the speculative public. To collect options information that is more likely attributable to these speculators, we focus on the front three months of options data, which is where the small speculators tend to gravitate. This is extremely important because we have found that the absolute ratio readings can vary substantially from stock to stock. This indicator represents a ratio of open puts to open calls on only those options due to expire over the following three months. Each daily SOIR reading is then compared to all other readings over the past year to develop a percentile rank.
Higher percentiles indicate relatively more pessimism, while lower percentiles suggest optimism.
Thus, a rank in the 90th percentile would mean that only 10 percent of all SOIR readings over the past year were higher, or more pessimistic. This suggests a relatively high level of negative sentiment, which can have bullish implications for a stock displaying strong fundamentals and technicals. The opposite argument can be made for a low percentile ranking, which can suggest a stock is potentially overextended and vulnerable to a sell-off due to heightened expectations. Note that relatively high levels of the ratio either precede or are concurrent with bottoms in the stock price. These high ratios reflect growing or peaking pessimism toward the stock, which can signal an approaching or already formed bottom.