Understanding the Put/Call Open Interest Ratio (SOIR)

The SOIR is a short-term put/call open interest ratio

Jun 23, 2017 at 12:36 PM
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    The Schaeffer's put/call open interest ratio (SOIR) is one of many sentiment indicators we use at Schaeffer's to identify expectations for a stock, exchange-traded fund, or sector. The SOIR measures short-term options, comparing the number of open call contracts to the number of open put contracts that are set to expire in the next three months. A stock's SOIR let's us see how traders with short-term objectives are positioning themselves -- whether they're call- or put-heavy.

    What the SOIR Involves

    SOIR readings above 1.0 suggest that puts are more prevalent than calls among near-term options. Conversely, readings below 1.0 indicate that calls are more numerous. While the SOIR number alone can tell us a lot, there are several factors that we need to examine to realize the entire story.

    The first thing we do to read the context of our ratio is look at its 52-week history. A rank of 0% reveals that calls are currently outnumbering puts by the greatest margin within the past 12 months. Conversely, a 100% ranking tells us that short-term traders are favoring puts over calls more than at any other time during the past year. 

    However, it should be noted that the SOIR includes both bought and sold options. As such, it's difficult to say with certainty that a SOIR in the 100th percentile of its annual range means near-term options traders are extremely bearish, as there's a possibility some of those puts may have been sold to open.

    So, What Does This All Mean?

    As an example to better understand the SOIR, let's look at Stock XYZ. If XYZ has an SOIR of 2.00, this would suggest that two put contracts are open for every call among near-term options.  Likewise, a rating of 0.50 on XYZ means that 50 put contracts have been opened for every 100 calls. While this number is lower than the previous example of 2.00, either SOIR could sit in a high or low percentile for its annual range.

    For example, if XYZ's SOIR of 2.00 is in the 75th percentile of its annual range, it means short-term options traders have been more put-heavy on the stock just 25% of the time during the past year. On the other hand, if XYZ's SOIR is in the 5th percentile of its annual range, it means options traders have rarely been more call-biased in the past 52 weeks, even if the absolute ratio indicates puts outnumber calls.

    Utilizing the SOIR as a Sentiment Indicator

    For a contrarian trader, the SOIR can give a glimpse into what type of price action speculators expect from the stock in the coming weeks. However, it's important to remember that no indicator, taken out of context, offers a complete picture of option activity. Open interest configurations can be revealing, but don't differentiate contracts that were bought to open from those that were sold to open. What's more, calls and puts can be bought to open in order to hedge existing stock positions. Due to these considerations, it's important to use our Expectational Analysis methodology, rather than considering these data points in isolation.

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