i have started paying more attention to option activity in the issues i am trading. but am struggling understanding put/call ratio. any advice would be greatly appreciated. any rule of thumbs too. have looked online a lot but still not 100% on it thanks
its an indicator of sentiment. people buy calls when they are greedy and buy puts when they are fearful. the ratio of how many of each they buy is the put call ratio. most people use it as a contrary indicator.
i get that part - thanks... but am interested in specific interpretation.... ie - i am hearing references to 3 to one being bullish is there a rot?
Hey. There are a few different Put / Call Ratios, and a few ways to massage them. cboe.com has data every day on index put/call, stock put/call, and a combo of them both. There a few people out there measuring Put$$ /Call $$, comparing at-the-money and a few out-of-the-money strikes (not everything), etc. Put / Call a good contrary indicator as was said, but sometimes tough to interpret. Long puts vs futures or long stock is bullish position but might look bearish to put / call analysis. 1 big put purchase by firm might set off stampede of traders hedging with butterfly, etc. Put / Call is 1 indicator. You'll get a few better answers than this, sit tight. kny 3
I have found p/c ratios most useful at extremes relative to the instrument or underlying you are trading. For example, one issue may show a consistent history of nicely moving for one day when it has an extreme 4/1 p/c ratio, another issue may show a nice weekly move at an extreme 3/1 p/c ratio. Extremes are all relative to the underlying and are usually not very frequent. when you see it in action it will make more sense. It's not an absolute but it can be helpful. I'm sure others will post other p/c uses.
just for any easy reference for you....any time its over one (1.2, 1.34...etc.) people are overly bearish on the market(s); might think of looking for long setups......and when it is around .70 people are overly bullish; and you might want to look for some short setup/plays. If you see it at .60-.65 people are far too giddy on the markets and look to short/long put the "giddiest of the giddy"! Just a tool to put in context with your myriad of other tools in your financial metric`s toolbox.