What is Put Call Ratio?
The put-call ratio is an indicator of market presumption, determined by dividing the total number of open put options by the total number of open call options over a given timeframe. Traders generally buy call options when they expect market prices to increase (bullish sentiment), whereas they purchase put options when they predict prices will decline (bearish sentiment). The put-call ratio can be computed using either open interest, indicating the total number of existing contracts, or trading volume, representing market activity.
How Put Call Ratio Works
The put-call ratio is a measurement of market presumption determined by dividing the quantity of traded put options by the quantity of traded call options. A ratio of 1 suggests equal interest in both options, but this is atypical. Historically, investors tend to be more bullish, leading to a lower average put-call ratio.
A put-call ratio above the historical average (often around 0.7 for equities) indicates growing bearish sentiment as more traders are buying put options. Conversely, a ratio below this average suggests bullish sentiment as call options are more popular. While the put-call ratio is a useful tool, it's essential to use it in conjunction with other indicators for a comprehensive market analysis. Data for calculating the put-call ratio is readily available from sources like the Cboe Options Exchange.