ISEE Sentiment Indicator

If we want to know how someone feels, a good course of action is usually just to ask them. If we want to know how a million someones feel, though, it would probably be pretty time-consuming to ask each of them in turn. That’s why, when investment analysts are trying to figure out how investors as a whole feel about the stock market, one of the things they look at is the ISEE sentiment indicator, also called the sentiment index. Like its name implies, it’s an indicator…of sentiment.

So...how do they do it? Surveys? Email questionnaires? Annoying automated telephone calls during the dinner hour?

Nope, none of the above. They simply throw the number of long call options purchased by individual investors, the number of long put options purchased by individual investors, and the number 100 into a calculation blender...and come up with a value that tells them what they want to know.

Here’s the formula:

ISEE = (LC/LP) x 100

LC is the number of new long call options bought and LP is the number of new long put options bought. When the indicator is below 100, it means that investors aren’t feeling all that optimistic—more long puts have been purchased than long calls—while a number above 100 means investors are feeling pretty groovy about the market situation. They’re fairly confident prices are going to go up.

Some might have noticed that we keep using the phrase, “individual investors.” That’s because the ISEE indicator doesn’t care about trades made by big firms or market makers. They’re not interested in how financial institutions feel about the market...they’re interested in how everyday, individual investors feel. So when those LCs and LPs are being tallied, it’s only new puts and calls ordered by individual investors that make the grade.