Put-Call Ratio

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Put-Call Ratio

What Is a Put-Call Ratio?

The put-call ratio is a measurement that is widely used by investors to gauge the overall mood of a market.

A “put” or put option is a right to sell an asset at a predetermined price. A “call” or call option is a right to buy an asset at a predetermined price.

If traders are buying more puts than calls, it signals a rise in bearish sentiment. If they are buying more calls than puts, it suggests that they see a bull market ahead.

Understanding the Put-Call Ratio

The put-call ratio is calculated by dividing the number of traded put options by the number of traded call options.

Key Takeaways

  • A put option gets the trader the right to sell an asset at a preset price.
  • A call option is a right to buy an asset at a preset price.
  • If traders are buying more puts than calls, it signals a rise in bearish sentiment.
  • If they are buying more calls than puts, watch out for a bull market ahead.

A put-call ratio of 1 indicates that the number of buyers of calls is the same as the number of buyers for puts. However, a ratio of 1 is not an accurate starting point to measure sentiment in the market because there are normally more investors buying calls than buying puts. So, an average put-call ratio of .7 for equities is considered a good basis for evaluating sentiment.

  • A rising put-call ratio, or a ratio greater than .7 or exceeding 1, means that equity traders are buying more puts than calls. It suggests that bearish sentiment is building in the market. Investors are either speculating that the market will move lower or are hedging their portfolios in case there is a sell-off.
  • A falling put-call ratio, or below .7 and approaching .5, is considered a bullish indicator. It means more calls are being bought versus puts.

The put-call ratio can be an indicator of how the market views recent events or earnings. A ratio at either extreme suggests an overly bearish or an overly bullish sentiment.

The data used to calculate put-call ratios are available through various sources, but most traders use the information found on the Chicago Board Options Exchange (CBOE) website.

Special Considerations

The put-call ratio helps investors gauge market sentiment before the market turns. However, it’s important to look at the demand for both the numerator (the puts) and the denominator (the calls).

The number of call options is found in the denominator of the ratio. That means a reduction in the number of traded calls will increase the value of the ratio. This is significant because fewer calls being bought can push the ratio higher without an increased number of puts being purchased. In other words, we don’t need to see a large number of puts being purchased for the ratio to rise.

As bullish traders sit on the sidelines, the result by default is that there are more bearish traders in the market. It doesn’t necessarily mean the market is bearish, but rather that bullish traders are in a wait-and-see mode until an upcoming event occurs like an election, a Fed meeting, or a release of economic data.

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The average put-call ratio for equities that is considered a good basis for evaluating sentiment.

It’s helpful to watch the put-call ratio to see how the market views recent events or earnings. When the ratio is at extreme levels, it might indicate an overly bearish or an overly bullish sentiment.

For this reason, some investors use the put-call ratio as a contrarian indicator.

A Contrarian Indicator

Contrarian investors use the put-call ratio to help them determine when market participants are getting overly bullish or too bearish.

An extremely high put-call ratio means the market is extremely bearish. To a contrarian, that can be a bullish signal that indicates the market is unduly bearish and is due for a turnaround. A high ratio can be a sign of a buying opportunity to a contrarian.

An extremely low ratio means the market is extremely bullish. A contrarian might conclude that the market is too bullish and is due for a pullback.

No single ratio can definitively indicate that the market is at its top or its bottom. Even the levels of the put-call ratio that are considered extreme are not set in stone and vary over the years.

Typically, investors compare current ratio levels to the average over some period of time to gauge if sentiment has changed recently. If the put-call ratio has fluctuated in a tight range and suddenly bumps higher, traders might see this as a sudden increase in bearish sentiment and make their moves accordingly.

Put-Call Ratio

What is the Put-Call Ratio

The put-call ratio is an indicator ratio that provides information about relative trading volumes of an underlying security’s put options to its call options. The put-call ratio has long been viewed as an indicator of investor sentiment in the markets, where a large proportion of puts to calls indicates bearish sentiment, and vice versa. Technical traders use the put-call ratio as an indicator of performance and as a barometer of overall market sentiment. Put-call ratios on broader indexes such as the S&P 500 are also used as more general gauges of market climate.

Basics of the Put-Call Ratio

A put is a derivative instrument that gives the holder the right, but not the obligation, to sell a security. A call, on the other hand, is a derivative instrument that gives the holder the right, but not the obligation, to buy a security. Holders of puts are expecting (or hedging against) the price of the security to go down. Owners of calls are expecting (or speculating on) the price of the security to go up.

The put-call ratio shows an underlying security’s put volume relative to its call volume over a period of time (typically a day or week) and is calculated simply by dividing put volume by call volume. When there are more open positions in puts than calls, the ratio is calculated to be above 1. Likewise, when call volume is higher, the ratio is less than 1. Analysts use the ratio to measure market sentiment. The Chicago Board Options Exchange (CBOE) publishes daily and weekly put/call options.

Understanding the put-call ratio is an important skill for those wishing to trade options. Learn to analyze the put-call ratio, and start trading put and call options yourself by taking Investopedia Academy’s Options Course. On-demand video training helps put the odds in your favor like the professionals.

Put-Call Ratio Interpretation

One way to interpret the put-call ratio is to say that a higher ratio means it’s time to sell and a lower ratio means it’s time to buy, because when the ratio is high it suggests that people are either expecting or protecting more readily against a future decline in the price of the underlying. A Put-Call ratio between 0.5 and 1 is considered a sideways trend in the markets.

Some also view the Put-Call ratio as a contrarian indicator. Traders know that derivatives are used to do more than place bets; they are used as hedges and insurance. If there’s a lot of insurance being placed to the sell side, it means traders are worried about prices falling.

Some traders buy when the put-call ratio is above 1, meaning the market is out of balance to the sell side, and sell when the put-call ratio is below 1, meaning the market is out of balance to the buy side. These traders are looking to make money on the correction. The interpretation of the ratio is left to the analyst’s or trader’s investment philosophy.

Key Takeaways

  • Put-call ratios are indicators of relative trading volumes of put options to call options in the options market.
  • A put-call ratio above 1 is considered to be an indicator of a selloff while a put-call ratio below 1 is an opportunity to buy. Some traders use the put-call ratio as a contrarian indicator, and buy when the ratio is above 1 and sell when the ratio is below that figure.

Example Use of the Put-Call Ratio

Sheila is a trader who uses put-call ratios as a tool to aid in her contrarian investment strategy. She buys on days when the put-call ratio is above 1 (or, a majority of traders are selling) and sells on days when the put-call ratio is below 1 (or, a majority of traders are buying).

CBOE Equity Put/Call Ratio:

CBOE Equity Put/Call Ratio is at a current level of 0.86, N/A from the previous market day and up from 0.57 one year ago. This is a change of N/A from the previous market day and 50.88% from one year ago.

  • Category:Market Indices and Statistics
  • Region:United States
  • Report:CBOE Daily Market Statistics
  • Source:Chicago Board Options Exchange

Chart

Historical Data

Data for this Date Range
April 1, 2020 0.86
March 31, 2020 0.70
March 30, 2020 0.68
March 27, 2020 0.70
March 26, 2020 0.58
March 25, 2020 0.65
March 24, 2020 0.63
March 23, 2020 0.62
March 20, 2020 0.83
March 19, 2020 0.88
March 18, 2020 0.98
March 17, 2020 0.86
March 16, 2020 1.10
March 13, 2020 1.00
March 12, 2020 1.28
March 11, 2020 1.02
March 10, 2020 0.75
March 9, 2020 1.12
March 6, 2020 0.89
March 5, 2020 0.78
March 4, 2020 0.64
March 3, 2020 0.73
March 2, 2020 0.76
Feb. 28, 2020 0.85
Feb. 27, 2020 0.86
Feb. 26, 2020 0.65
Feb. 25, 2020 0.80
Feb. 24, 2020 0.70
Feb. 21, 2020 0.73
Feb. 20, 2020 0.51
Feb. 19, 2020 0.45
Feb. 18, 2020 0.51
Feb. 14, 2020 0.58
Feb. 13, 2020 0.55
Feb. 12, 2020 0.48
Feb. 11, 2020 0.45
Feb. 10, 2020 0.46
Feb. 7, 2020 0.56
Feb. 6, 2020 0.47
Feb. 5, 2020 0.51
Feb. 4, 2020 0.46
Feb. 3, 2020 0.50
Jan. 31, 2020 0.74
Jan. 30, 2020 0.61
Jan. 29, 2020 0.50
Jan. 28, 2020 0.55
Jan. 27, 2020 0.64
Jan. 24, 2020 0.70
Jan. 23, 2020 0.54
Jan. 22, 2020 0.52

There is no data for the selected date range.

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Stats

Last Value 0.86
Latest Period Apr 01 2020
Last Updated Apr 1 2020, 18:35 EDT
Next Release Apr 2 2020, 18:00 EDT
Average Growth Rate 287.0%
Value from 1 Year Ago 0.57
Change from 1 Year Ago 50.88%
Frequency Market Daily
Adjustment N/A
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Notes: CBOE put to call ratio for equity products.

Please note that this feature is only available as an add-on to YCharts subscriptions.

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