The Put/Call Ratio: What Options Traders Are Thinking

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The Put/Call Ratio: What Options Traders Are Thinking

Andrew Hartís recent article ìOptions Traders Call for Market Sell-Offî demonstrates how traders use the put/call ratio ñ a measurement of the number of put options traded relative to call options.

This is generally viewed as a contrarian indicator. More calls being traded is often viewed as a short-term bearish signal, while more puts being traded may indicate short-term market bottoms.



As Andrew points out:

The CBOE Equity Put/Call Ratio hit the lower extreme on Monday, which means there were an extreme number of calls purchased relative to puts. Based on the contrarian viewpoint this is a strong sell signal on the markets. In my view, Iíve found the Equity Put/Call Ratio (EPCR) extremely valuable in helping define short-term tops and bottoms.

Of all put/call ratios the EPCR is the best to use because it only looks at equities and excludes options traded on indices and ETFs (including inverse)óthis provides a direct look into what market participants are thinking.

I created my own chart that shows the S&P 500 and the CBOE Equity Put/Call ratio (also including Bollinger bands to help show extreme readings).

Pointing to data from Monday, August 24 Andrew explains:

I should point out that this ratio did seem to rise back to a more ìnormalî level on the day after Andrew posted his chart (Tuesday August 25).

This indicator certainly isnít perfect, but you can see the April 15 signal Andrew points out, and other instances where this reading seemed extreme ñ even though the signal turned out to be false. Also note various times when a higher than normal put/call indicated at least a short-term market bottom.
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