TradingFlow
Ask or search…
⌃K
🚁

Sentiment

What is Trade Sentiment

Order flow sentiment is a distinct technical indicator that analyzes actual investor trading data to determine the direction of market trends. This theory is rooted in the idea that investors make "bets" on market direction by purchasing puts or calls at the high end of the bid-ask price spread. Traders can gain valuable insights into market trends by calculating overall market sentiment based on this investor behavior. This information can be useful when making investment decisions for specific stocks.

How to t Trade Side and Trade Sentiment

First, let's explain what we mean when we say an option is being bought or sold. Every trade has a buyer and a seller and that trade is made up of a dealer and customer on the options market. What we are trying to determine is if the customer orders are on the buy side or sell side. Customers enter orders into the market to buy or sell options. The dealer displays prices (quotes) they are willing to buy or sell any particular option contract.
A car dealer makes a good analogy to help you better understand this concept. A car dealer is willing to buy your used car and/or sell you a used car. The difference between the price a dealer buys and then sells is called the spread or profit margin. Similarly, when an options dealer trades an options contract with a customer, the dealer will have a theoretical profit margin based on a mathematical equation. As part of that equation, they tend to hedge their position with the underlying stock to mitigate directional risk.
For example, if the dealer is willing to buy an option contract for $1, we call this the bid. If a dealer is willing to sell the same contract for $1.25, we call this the ask or offer price. So, the dealer quote would be the bid and ask
Bid
Ask
$1.00
$1.25
Now, let's say we witness a trade of 10 contracts for $1.25. We can infer that the incoming order was a buy of 10 contracts because the trade of $1.25 paid was the ask price of the dealer.
It is impossible to ascertain with complete accuracy whether an option was bought or sold. It should be noted that if the trading system is unable to confidently determine whether the trade was initiated by a buyer or a seller, it will be labeled as "undetermined" or "mid" and will not have any impact on the overall sentiment inference. Nevertheless, by utilizing an advanced interpretation algorithm and analyzing various relevant data points, we can achieve a high degree of accuracy.
​

The relationship between Trade Side and Trade Sentiment

BULLISH: the sentiment of this trade is inferred from call trades executed on the ask side or put trades executed on the bid side, because it is likely the buyer is urgently buying a call option or the seller is urgently selling a put option.
BEARISH: the sentiment of this trade is inferred from put trades executed on the ask side or call trades executed on the bid side, because it is likely the buyer is urgently buying a put option or the seller is urgently selling a call option.

Total Market Sentiment For Specific Symbol

As an options trader, it's important to gauge whether the market sentiment is bullish or bearish. One way to do this is by examining the net option volume for the day, which indicates whether there are more bullish or bearish trades. While we can't know for sure what traders are thinking or what they know, analyzing their behavior in stock options trading can give us insight into their sentiment towards a specific stock. By subtracting the total bearish trades from the total bullish trades, we can determine whether the overall volume is bullish or bearish.
​
​
​