White Paper

Analysis of Erlanger Data Series: Equity Options

By: Philip B. Erlanger, CMT

Ever since the introduction in the early 1970s of standardized, listed options trading, investment analysts have observed the actions of options traders as a measure of sentiment. Overall measures of equity options trading, such as the CBOE Put/Call Ratio, have been the sole measurements of sentiment from the equity options data. Work on individual issues has been sporadic, non-comprehensive and incomplete. This white paper makes an effort to rectify these shortcomings, and to explain the specifics and derivations of the Erlanger Equity Options Data Series.

I. Introduction

Perhaps the single greatest reason as to why little research has been done on stock specific options trading is data - or the lack of good data. End-of-day data on all traded equity options contracts in past years has been almost impossible to generate… and the amount of errors in such data made it impossible to use. Currently, there are just a few sources of such data, and the issues of errors and reliability are improved, though not eliminated. Moreover, with the speed of today's data processors, the time it takes to process the hundreds of thousands of daily transactions records has become manageable. The goal of such processing is to historically record the price, volume and open interest data from the raw options data, on a stock-by-stock basis, so as to glean an accurate understanding of the ebb and flow of sentiment on the part of equity options traders. We will evaluate the benefits of such analysis.