put-call ratio

Put-Call Ratio

A ratio of the trading volume of put options to call options. It is used to gauge investor sentiment.

Notes:

For example, a high volume of puts compared to calls indicates a bearish sentiment in the market.

See also: Call, Option, Put

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Put-call ratio

The ratio of the volume of put options traded to the volume of call options traded, which is used as an indicator of investor sentiment (bullish or bearish).

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put-call ratio

A ratio that compares the trading volume in put options with the trading volume in call options. Technicians use the put-call ratio to forecast market turns. A high ratio with heavy trading in puts indicates strong bearish sentiment and the possibility of a market bottom. A relatively low put-call ratio with heavy trading volume in calls indicates very bullish sentiment and a probable market top. As with many other technical indicators, use of the put-call ratio assumes that most investors are wrong.

Case Study Like most technical indicators, the put-call ratio can prove very misleading when it is influenced by unusual factors. In February 1996, the ratio nearly reached five, meaning that put options were nearly five times as active as call options. This high ratio would usually be interpreted as reflecting very bearish investment sentiment, and it caused many investors to view the stock market with great caution. Contrarians, who believe the majority of investors are usually wrong, would consider the unusually high ratio to be very bullish. In fact, the ratio was artificially high and was providing false signals to both groups of investors. The heavy trading in put options was largely the result of the owners of puts selling existing holdings of these contracts and simultaneously purchasing different put contracts. For example, a holder of March put options would sell those contracts and replace them with April put options. Rolling the options forward caused a great deal of activity in put options even though a large portion of this activity represented the trade of existing holdings of puts for different puts.