Put/Call ratio, Options Trading, Uncovered Options, Naked Options, SPY, QQQ, Trading System, Trading Strategy, signals

Put/Call ratio

To calculate the Put/Call ratio, divide the volume of put option contracts by the volume of call option contracts. Chicago Board Options Exchange (CBOE) calculates this ratio.

To smooth out the rapid changes in this ratio, a 10-day moving average is often used.

When the market is very bullish, the volume of call options will be much larger than the volume of put options because traders are optimistic about future price movements. The Put/Call Ratio may be around 0.6. Because bullishness has reached an extreme level, many traders anticipate a downtrend at this level.

When the Put/Call Ratio is around 0.8, the market attitude is considered neutral. Naturally there is a tendency for more calls to be sold than puts.

The volume of call options will be smaller than the volume of put options, when the market is very bearish because traders are pessimistic about future price movements. At this time the Put/Call Ratio may be around 1.1. When the Put/Call Ratio rises above 1.0, many traders anticipate a new uptrend because bearishness has reached an extreme level.

The Put/Call ratio gives an indication of the level or bullishness or bearishness in the market because a put/call ratio indicator is considered a sentiment indicator. Because it indicates a possible reversal of trend, a sentiment indicator is interpreted in a contrarian sense. It warns of a downturn in the market when there is extreme bullishness. It is also interpreted as a precursor to an upturn in the market when there is extreme bearishness.

The McClellan Oscillator or the Arms Index can be used as further confirmation of an indicated trend reversal in conjunction with Call/Put ratio.

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