What is the Put/Call Ratio?
The Put/Call Ratio is a sentiment indicator that measures the relative trading volume of put options versus call options. It's calculated by dividing the number of traded put options by the number of traded call options.
Put/Call Ratio = Put Volume ÷ Call Volume
Interpreting the Ratio
| Ratio | Interpretation |
|---|---|
| < 0.7 | Bullish sentiment (more calls traded) |
| 0.7 - 1.0 | Neutral |
| > 1.0 | Bearish sentiment (more puts traded) |
| > 1.2 | Extreme bearish (contrarian bullish) |
Types of Put/Call Ratios
Equity Put/Call Ratio
Options on individual stocks only. More volatile and reflects retail sentiment.
Index Put/Call Ratio
Options on market indices (SPX, SPY). Includes more institutional hedging activity.
Total Put/Call Ratio
Combines all options. The most commonly cited version.
CBOE Put/Call Ratio
Specifically tracks options traded on the Chicago Board Options Exchange.
Why the Put/Call Ratio Matters
Sentiment Gauge
- High ratios indicate fear and bearish positioning
- Low ratios indicate complacency and bullish positioning
Contrarian Indicator
Extreme readings often signal potential reversals:
- Very high ratio (>1.2): Excessive fear may indicate a bottom
- Very low ratio (<0.5): Excessive greed may indicate a top
Confirmation Tool
Use alongside other indicators to confirm market direction.
Using Put/Call Ratio in Trading
As a Contrarian Signal
When the ratio reaches extreme levels, consider the opposite position:
- Extreme bearishness → Look for buying opportunities
- Extreme bullishness → Consider taking profits or hedging
Moving Averages
Raw daily data is noisy. Many traders use:
- 5-day moving average for short-term sentiment
- 21-day moving average for intermediate trends
- Compare current ratio to historical ranges
Context Matters
- During strong uptrends, elevated ratios may persist
- During corrections, low ratios may continue lower
- Always consider the broader market context
Limitations
- Hedging noise: Institutions buy puts for hedging, not speculation
- Options expiration: Ratio can spike around expiration dates
- Not a timing tool: Extremes can persist longer than expected
- Single data point: Should be combined with other analysis
Put/Call Ratio vs. Other Sentiment Indicators
| Indicator | What It Measures |
|---|---|
| Put/Call Ratio | Options market sentiment |
| VIX | Expected volatility/fear |
| AAII Sentiment | Retail investor surveys |
| Short Interest | Bearish stock positions |
Historical Context
During major market events:
- March 2020 COVID crash: Put/Call spiked above 1.5
- Bull market peaks: Ratio often drops below 0.6
- Recovery beginnings: High ratios begin declining
Key Takeaways
- Put/Call ratio measures relative put vs. call activity
- Extreme readings often precede market reversals
- Best used as a contrarian indicator at extremes
- Combine with other sentiment and technical indicators
- Crossbearing incorporates options flow data including put/call dynamics