Options Put and Call Ratio
Options Put and Call Ratio
As a trader, what would you give to be able to know what the rest of the market participants are doing at any given time? If a broker told me he could provide me that information each and every day, I'd be so appreciative I might even let him charge me $25 a round turn. While a secret report is not going to magically appear in your in box, the Put and Call Ratio (TradeStation symbol $WPCVA) is as close to actually having this information that a trader is going to get.
Calculate Options Put and Call Ratio
The Put and Call Ratio measures how many put options trading are bought versus call options trading. The formula is very simple to calculate--take the volume for options trading puts and divided by the volume for options trading calls. (For anyone who is not familiar with options trading, buying a put is making a bet that the market is going to fall, and buying a call is making a bet that the options trading market is going to rise). If there are 50,000 options trading puts sold and 100,000 calls, the ratio is .5. If there are 125,000 puts sold and 85,000 calls, the ratio is 1.47.
Put and Call Ratio Types
There are three main Put and Call Ratio that are generated throughout the day--the equity Put and Call Ratio, the index Put and Call Ratio, and the combined equity/index Put and Call Ratio. The equity Put and Call Ratio is generally very low, which reflects a retail crowd that has a tendency to favor the long side (more call buying). The index Put and Call Ratio is usually very high (more put buying), which reflects an institutional mindset that wants to stay hedged for any unexpected move lower. The combined equity/index Put and Call Ratio reflects both of these groups and gives a trader the best gauge of what the overall market participants are thinking, and, more importantly, where they are placing their bets. It is this combined equity/index stock options trading Put and Call Ratio that I watch during the trading day.
Digg This | Bookmark on del.icio.us | Submit to Reddit
|
Indicators
