When it comes to gauging the stock market’s sentiment as a function of who is buying what, there is little that compares to tracking options buying activity. This is because options are not at all like buying shares of stock, as there are two major factors at play that significantly alter the risk-to-return profile of any given investment or trade idea.
Investors who buy a stock have a linear expectation of one-to-one returns on their capital, and the same goes for the inherent risk of the investment. On the other hand, options carry the aspect of leverage in them, as well as an expiration date, which makes the stakes even higher in terms of volatility in the duration of a given operation, as well as the fact that traders need to have the timing right lest they expire in their positions with a total loss.
