What Is the ISEE Sentiment Index and How Does It Work?

The ISEE Sentiment Index measures investor sentiment in the options market by tracking opening buy-to-open call and put transactions. Unlike traditional put/call ratios, it focuses solely on retail investors initiating new positions, offering insight into their market expectations.

Understanding this index helps traders gauge whether investors are leaning bullish or bearish based on actual trading activity.

Calculation Methods

The ISEE Sentiment Index filters out institutional trades and market maker transactions, which are often driven by hedging rather than speculation. This focus provides a clearer picture of individual traders’ positioning.

The index is calculated by dividing the number of call options purchased to open a position by the number of put options bought under the same conditions, then multiplying by 100. A reading above 100 indicates more calls than puts, signaling optimism. A reading below 100 suggests a preference for puts, reflecting expectations of declining prices.

Key Components

The ISEE Sentiment Index is built on three primary elements: options volume, call and put data, and the interpretation of the resulting ratio.

Options Volume

Options volume represents the total number of contracts traded within a given period. The ISEE considers only buy-to-open transactions, excluding closing trades, exercises, and assignments. This ensures the index reflects fresh sentiment rather than adjustments to existing positions.

For example, if 10,000 call options and 5,000 put options are bought to open new positions in a day, the index calculation includes only these trades. This differs from broader put/call ratios, which often factor in all trades, including institutional hedging. By isolating new retail-driven trades, the index provides a more accurate measure of speculative sentiment.

Call and Put Data

The index tracks only call and put options bought to open, ignoring contracts that are sold or written. A call option gives the buyer the right to purchase an asset at a predetermined price, while a put option grants the right to sell.

Only transactions initiated by retail investors are included, with trades from market makers and institutional participants excluded. Professional traders often use options for hedging rather than directional speculation. For instance, if a hedge fund sells put options for income, that trade is not reflected in the ISEE calculation. Instead, the index captures only trades where an individual investor is taking a new bullish or bearish position.

Ratio Interpretation

The ISEE Sentiment Index is expressed as a ratio, dividing the number of qualifying call options by the number of put options and multiplying by 100. A value above 100 indicates more calls than puts, suggesting a bullish outlook among retail traders. A value below 100 implies more put purchases, signaling bearish sentiment.

For example, if the index reads 150, it means that for every 100 put options bought, 150 call options were purchased, indicating optimism. Conversely, a reading of 75 suggests put buying is outpacing call purchases, reflecting concerns about declining prices. Understanding these fluctuations helps traders assess market sentiment and adjust strategies accordingly.

Bullish and Bearish Signals

The ISEE Sentiment Index helps identify whether retail traders are positioning for gains or bracing for declines. A consistently high reading suggests optimism, often occurring during strong market trends or ahead of anticipated positive news. However, an extreme surge may indicate excessive exuberance, which can precede a pullback if sentiment becomes too one-sided.

A declining ISEE value can signal rising caution. This often happens before earnings season or when economic data suggests slowing growth. A sharp drop may indicate traders are adopting protective strategies due to geopolitical tensions, Federal Reserve policy changes, or corporate earnings misses. In some cases, an extremely low reading can serve as a contrarian signal, suggesting fear may be peaking and a market rebound could be near.

Accessing Current Data

Tracking the latest ISEE Sentiment Index values requires access to real-time market data, typically provided by financial platforms specializing in options analytics. Many brokerage firms and trading terminals aggregate this information, allowing investors to monitor sentiment shifts throughout the day.

Unlike widely available stock indices, the ISEE is often part of premium data services, catering to traders who rely on options activity for decision-making. Nasdaq provides the index through its proprietary data services, offering historical trends and real-time readings. Some third-party platforms also incorporate the index into broader sentiment analysis tools, combining it with volatility measures or sector-specific options flow to help investors determine whether sentiment shifts are stock-specific or part of a broader market trend.