Put-call ratio

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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).
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Put-Call Ratio

The ratio of the trading volume of puts to the trading volume of calls in a given market. Investors sell puts when they believe that prices on the underlying assets will fall by the expiration date. Analysts thus use the put-call ratio to determine market sentiment, with a high ratio indicating a bearish sentiment and a low ratio indicating a bullish sentiment.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.

Put-call ratio.

Since investors buy put options when they expect the market to fall, and call options when they expect the market to rise, the relationship of puts to calls, called the put-call ratio, gives analysts a way to measure the relative optimism or pessimism of the marketplace.

The customary interpretation is that when puts predominate, and the mood is bearish, stock prices are headed for a tumble.

The reverse is assumed to be true when calls are more numerous. The contrarian investor, however, holds just the opposite view. For example, a contrarian believes that by the time investors are concentrating on puts, the worst is already over, and the market is poised to rebound.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Put/Call Ratio. The CBOE also presents daily data on the ratio of put options to call options for equities, indices, and their total (equity plus indices).
Question--What would a high put/call ratio indicate?
It gives for each time interval of 15 minutes from the opening to the closing of the Paris Bourse the intraday pattern in the number of transactions as well as the put/call ratios. The put/call ratio defined with respect to the number of transactions has an inverted U-shaped form.
Figure 10 reports put/call ratios according to the degree of parity for PX1 and PXL calls and puts for the period 1995-1998.
One of the most-trusted short-term market indicators is the put/call ratio in the options exchanges, where individual customers play a larger role than they do in other markets.
Put/Call ratio is often used to measure investor sentiment, the ratio serves as a predictor of investor behavior.
The said statistics table emphasizes top trading issues on implied volatility, volumes, options volume gainers, volatility gainers, implied or historical volatilities, options volumes, put/call ratios and call/put ratios.
Performing daily cross-sectional analyses from 1990 to 2001, they find that buying stocks with low put/call ratios and selling stocks with high put/call ratios generates an expected return of 40 basis points per day and 1 percent per week.