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A Look at the Put/Call Ratio


It can be as simple or complicated as you want it to be.


This week's look is at an indicator that has been around for a long time, has become a part of nearly every charting package, is widely quoted by those who don't have a clue what it means, is widely despised by those who know exactly what it means, yet remains one of the most effective tools in a trader's toolbox.

This week, we're taking a peek at the put/call ratio.


The put/call ratio shows how many puts were traded at a given time divided by the number of calls traded over the same time period.

A put option gives the holder the right to sell a stock (or index or future) at a certain price by a certain time. At its most basic level, the buyer of a put option expects the underlying stock to decline in price. A call option gives the holder the right to buy the stock at a certain price by a certain time. A buyer of a call option expects the stock to rise in price.

Therefore, this indicator measures how much traders want to bet on lower prices versus how much they want to bet on rising ones. The fewer puts being traded compared to calls, the lower the put/call ratio will be, and the more we can say that optimism is high. It is a contrary indicator and generally we want to take the other side of the extreme. See the "challenges" section for a few caveats about this interpretation.

When traders reference "the put/call ratio," most are talking about the values from the Chicago Board Options Exchange, one of the two major options exchanges in the U.S. It computes how many options were traded on its exchange during the day and presents the data publicly for anyone wishing to view it.

The CBOE also breaks down the volume between equity options and index options. Index option volume is not a good contrary indicator, so some use the ratio monitoring equity options only.

There are many, many variants of this indicator. For example, the ISE options exchange also publicly disseminates a put/call ratio (or actually a call/put ratio). Merrill Lynch calculates an in-house put/call ratio for their clients. OptionsExpress computes an indicator based on the trades being placed through their trading platform.

All of them are different, but inherently the same – they try to gauge, in real-time using real money, how bullish or bearish traders are.


Because buyers of options can control a good amount of stock for a small premium, it is often a choice for those who wish to speculate with a part of their portfolio, or leverage up their capital.

When we see traders speculate or, especially, leverage, using a wasting asset like options, then we have a good chance to see more emotional decisions being made. When traders' hands are being forced, then they make more bad decisions.

The put/call ratio is one of those rare measures that works on all time frames, from intraday to weekly. As noted above, it is a contrary indicator, so when it suggests that traders are overly optimistic, then we often see the broader market struggle going forward; when it shows that traders are extremely pessimistic, it almost always plays to ride along with Hoofy.

This indicator has been effective since its public introduction in the 1980's (by Martin Zweig in an issue of Barron's), despite its well-known nature and multiple hurdles. Its concept is relatively simple to grasp, and a good amount of data is available for free on a daily or even intraday basis.


This section alone could occupy an entire page, just ask Profs Succo or Warner.

The fact of the matter is, the total put/call ratio from the CBOE is not a good reflection of how optimistic or pessimistic traders really are. With 8,000 hedge funds in existence, there are innumerable strategies being employed each and every day in the options markets.

If you've followed Prof Succo's posts, you know that often times he doesn't really even care about market direction – he's a volatility trader. So assuming that he's bearish because he traded a large number of put options is almost certainly way off base.

Many traders sell options to open, which flips the interpretation of this indicator on its ear. A trader selling a put option as an opening transaction usually wants the stock to rise, not fall, so in that case, if it was repeated over and over, a high put/call ratio could actually mean that traders are quite optimistic.

There are ways to get around some of these issues. I show one of them below, the ROBO put/call ratio. The ROBO is an acronym for Retail-Only, Buy-to-Open, which means that it only looks at trades for 10 contracts or less (getting rid of the impact of large sophisticated traders), and only options that are bought to open (eliminating the distortion of options that are sold as opening transactions).

Since small traders tend to buy options as a speculative endeavor, looking at the data in this manner can give us a more pure look at what traders are actually up to. That still doesn't mean it's a perfect indicator, and ironically the most impure ratio of them all, the total p/c ratio from the CBOE, can be just as effective.



The first chart is the equity-only put/call ratio from the CBOE, on a 5-, 10- and 21-day moving average basis. The green and red bands show how extreme the indicator currently is compared to recent history (put/call ratios tend to trend along with the market, making some type of de-trending adjustment helpful).

The red and green circles highlight those times that traders ostensibly became overly optimistic and pessimistic, respectively. True to form, the S&P 500 had some difficulty maintaining higher prices after the optimistic extreme, and did well from the long side after the fear had built up in October. Looking at the data in this manner doesn't give us a lot of signals each year, but the ones we do get tend to be quite effective.

The current data isn't all that conclusive. On a short-term basis, we have seen put volume dry up a bit, which has pushed the equity-only ratio towards the upper end of its range, though it can't quite be considered extreme. And on a longer-term basis, the ratio is still in the middle of its ranges, not giving us much of a guide one way or the other.

The second chart is the ROBO put/call ratio of small-trader sentiment. The red circles highlight those times these traders had bought at least 3 times as many call options as put options – truly a sign that they expected more good times. The market generally didn't accommodate them going forward, and we often see at least a short-term scare after such extremes.

Recently, we've seen these traders back off the call buying frenzy they had been on in November. They're still buying about 227 calls for every 100 puts, which is historically high, but the indicator gives its best warnings when we see true extremes of 300 or more calls to every 100 puts. If we see that again, it will be time to let Boo do his thing.
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