CBOE OEX DETERMINATION INDEX

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APPLICABLE TIME FRAME(S):  

INTERMEDIATE

UPDATE SCHEDULE:

Each weekday night by 7:00 PM EST

EXPLANATION:

OEX is shorthand for the S&P 100, an index made up of the 100 largest companies in the S&P 500.  Open interest is defined as the total number of option contracts outstanding.

Open interest is increased by opening transactions and decreased by closing transactions. Someone buying a call to open (a bullish position) would increase open interest by one, and someone selling a call to open (a bearish position) would also increase open interest by one. 

Our Determination Index strives to understand just how determined OEX traders are to have exposure to the long side of the market (via call options) or the short side (via put options).  So the Determination Index combines both volume and open interest in these options to see how much volume is going into creating new positions.

What we see is that when OEX traders are using a tremendous amount of volume to open new call positions, it reflects a generally positive bias among them and tends to lead to a higher market going forward.  Conversely, when we see them pushing to increase their put exposure, it consistently leads to a weak market.

GUIDELINES:

Very high ratios (above the upper red line on the chart) show that OEX traders want heavy put expsoure.  We find that to be bearish for the market.  Very low ratios (below the lower green line) show that these traders are clamoring to get call exposure which tends to be bullish for the market.

STATS:

*Standard Deviation.  See below...

68% of readings (1 standard deviation) should be between 0.4 and 0.6

95% of readings (2 standard deviations) should be between 0.3 and 0.7

99% of readings (3 standard deviations) should be between 0.2 and 0.8

In other words, we should expect a reading under 0.2 or over 0.8 only between 2-3 times per year.  Since such a reading would be highly unusual, it suggests that we are seeing an unsustainable trend.  These figures assume a normal distribution curve, which is not necessarily true in this case (it has a very slight positive skew - meaning there are few very small readings, but several very large readings). 

ADDITIONAL RESOURCES:

Chicago Board Options Exchange (www.cboe.com)

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