Question for option people from someone who never trades options: One thing I track daily for part of my market direction indication and confirmation are the put/call ratios. I have mainly watched the index ratio but have wondered why it shows the opposite "sentiment" when compared to the index ratio. In our bear market the index put/call ratio I expect to see the 2:1 put to call ratio but why is the total put/call showing such a contrast? This is last week's daily ratios: Index P/C Ratio 1.60 1.15 1.03 1.05 1.44 1.45 1.54 Total P/C Ratio .83 .77 .65 .75 .77 .91 .93 Do the totals include some element I'm unaware of (apparently) that explains why they seem to indicate a rising market sentiment?
Niterider, I, too, am interested in the Put/Call ration. I just recently started looking at this. One thing that I have found is in Martin Schwartz's book "The Pit Bull" where he uses the put/call ratio as a contrarian indicator, ie when the put/call ratio is 1.00 or above, it shows an extreme bearish sentiment, which he sees as a buying signal, and if the ratio is below 0.45, the optimism is too great and he sees it as a selling signal. Also, I read seanote's thread here on ET where he thinks it is one of the most important indicators to look at. It would be great if he would elaborate on this.
Niterider - total P/C includes Index only options and Equity only options. It's the larger volume equity only put/call ratio that swings the total P/C. Index only P/C tends to be over 1 while equity only P/C tends to be less than 1.
If you have omega prosuite? you can try use P\C ratio as chart and compare with indexes.. you can download data from their ftp and use it. At my opinion-its very contradictory indicator. i would avoid to make any decisions based on it. good Luck!
Take a look at www.schaefferresearch.com he is the expert in put/call ratios and sentiment. Bottom line is that you are right it is anomoly at the moment. The markets are down but bullishness as displayed by put call ratios are not reflecting negative sentiment. There are many arguements about this particuarly on the VIX because hedging skews the results. What ever way you cut, historically we have contrary contrarian measure. In order for the market to start a new leg up from here the rule will have to be re-written. The most amazing are the QQQ's which show p/c all out of wack. One theory is that people have been writing long term calls on declining holding but why they would not cover now, who knows. Also look at www.cboe.com and beleive it or not www.nasdaq.com is a great site for studying open interest. Go to quotes, then options and follow the thread you will get up a huge table that shows all months and corresponding OI. Cheers Mike