(Written by Alexander Crawford. Options data sourced from Schaeffer’s.)
Stock options are interesting because they can provide a glimpse into the future – or at least what investors predict the future holds. Because options pay off at a future date from the time of purchase, stock option trends can indicate where investors expect stocks to move.
The two major stock options are call options and put options, and they represent optimism and pessimism respectively. Call options are the option to buy a stock at a future date and at a price set today – calls become profitable when the stock rises, so buying a call indicates the investor expects the stock to rise.
Put options are the exact opposite. Puts are the option to sell a stock at a future date at a price determined today, which becomes profitable if the stock falls over that time period. Investors buy puts when they become pessimistic on the stock’s outlook.
The Put/Call Ratio
The ratio of open interest put options to call options is called the put/call ratio, and it’s a popular gauge for options traders’ sentiment on the stock.
If a stock sees a significant increase in its put/call ratio, it represents a bearish (or pessimistic) development in options traders’ outlook on the stock. Decreases indicate bullish changes in sentiment.
To demonstrate this idea, we ran a screen on the 200 largest stocks by market cap, which we refer to as the “mega-cap stocks.” We screened these stocks for those seeing significant decreases in their put/call ratios over the last 10 trading days, indicating bullish changes in sentiment from the options market.
Do you agree with options traders’ optimism on these names?
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List sorted by decrease in put/call ratio.
1. Nippon Telegraph & Telephone Corp. (NTT): Provides telecommunications services to residential and business customers in Japan. Market cap of $74.32B. Put/call ratio decreased from 2.3 to 0 between 10/18 and 10/31, a decrease of 100.00%.
2. Fomento Econ (FMX): Engages in non-alcoholic beverage, retail, and beer industries. Market cap of $119.96B. Put/call ratio decreased from 0.54 to 0.11 between 10/18 and 10/31, a decrease of 79.63%.
3. Companhia de Bebidas Das Americas (AMBEV): Engages in the production, distribution, and sale of beer, draft beer, carbonated soft drinks, malt, and other non-alcoholic and non-carbonated products in the Americas. Market cap of $105.13B. Put/call ratio decreased from 0.72 to 0.21 between 10/18 and 10/31, a decrease of 70.83%.
4. News Corp. (NWSA): Operates as a diversified media company worldwide. Market cap of $46.09B. Put/call ratio decreased from 1.1 to 0.33 between 10/18 and 10/31, a decrease of 70.00%.
5. LM Ericsson Telephone Co. (ERIC): Provides communications equipment, professional services, and multimedia solutions to mobile and fixed networks operators worldwide. Market cap of $34.08B. Put/call ratio decreased from 1.11 to 0.34 between 10/18 and 10/31, a decrease of 69.37%.
6. TransCanada Corp. (TRP): Operates as an energy infrastructure company in North America. Market cap of $30.26B. Put/call ratio decreased from 0.12 to 0.04 between 10/18 and 10/31, a decrease of 66.67%.
7. Telefonica, S.A. (TEF): Provides fixed and mobile telephony services primarily in Spain, rest of Europe, and Latin America. Market cap of $97.53B. Put/call ratio decreased from 1.03 to 0.42 between 10/18 and 10/31, a decrease of 59.22%.
8. Time Warner Inc. (TWX): Operates as a media and entertainment company in the United States and internationally. Market cap of $36.56B. Put/call ratio decreased from 1.19 to 0.58 between 10/18 and 10/31, a decrease of 51.26%.
9. Teva Pharmaceutical Industries Limited (TEVA): Develops, produces, and markets generic drugs; and proprietary branded pharmaceuticals in various therapeutic categories and active pharmaceutical ingredients worldwide. Market cap of $38.44B. Put/call ratio decreased from 0.8 to 0.42 between 10/18 and 10/31, a decrease of 47.50%.
10. Canadian Natural Resources Limited (CNQ): Engages in the exploration, development, production, marketing, and sale of crude oil, natural gas liquids, and natural gas. Market cap of $38.70B. Put/call ratio decreased from 0.77 to 0.42 between 10/18 and 10/31, a decrease of 45.45%.
Interactive Chart: Press Play to see how analyst ratings have changed for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.