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.
Investment ideas
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?
List sorted by decrease in put/call ratio. (Click here to access free, interactive tools to analyze these ideas.)
1. Nippon Telegraph & Telephone
2. Fomento Econ
3. Companhia de Bebidas Das Americas
4. News Corp.
5. LM Ericsson Telephone
6. TransCanada
7. Telefonica
8. Time Warner
9. Teva Pharmaceutical Industries
10. Canadian Natural Resources
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Alexander Crawford does not own any of the shares mentioned above. Options data sourced from Schaeffer's.