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Computerized Investing > Fourth Quarter 2010

The Put-Call Ratio

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by CI Staff

The Put-Call Ratio

Sentiment indicators have always been popular among traders, but as the market undergoes seemingly endless gyrations these days, more and more investors are looking at measures of sentiment to provide some insight into where the market may be headed next. One sentiment measure that garners a lot of attention is the put-call ratio: It is widely recognized as being one of the most reliable indicators of future market direction.

The put-call ratio is called a sentiment measure because it signals the possibility of market reversals by measuring the “feelings” of options traders. When options traders become too bullish, the likelihood of a market downturn increases, and vice versa.

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Discussion

Charles from NY posted over 3 years ago:

Instead of doing the opposite of what the PC equity indicates with the average person, why not use the PC index and do exactly as the "pros" do?


John from MI posted over 3 years ago:

If option traders lose money most of the time why are options so popular to investors?


Wayne from IL posted over 3 years ago:

I have sat in on a few free options trading courses over the years and they all border on "get-rich-quick" affairs. They tend to gloss over the risks of option trading and focus on the low cost and potential for high profits.


Dave from WA posted over 2 years ago:

The charts are not readable even when blown up.


Marjorie Holden Ph.D. from NY posted over 2 years ago:

I am not a very skilled options trader. However, when you own about 1000 shares of a volatile stock, it is not really difficult to sell a covered call- not too far out. Usually one to three months, although I have done longer. If the stock does not reach the call price, even at a $1.00 a share, you have made an easy $1000. If the stock gets called, and it really is volatile, you can now sell a put. Or just wait for it to go down, if puts make you edgy.

I don't do spreads or anything fancy, but just doing this can give you a nice of chunk of change annually. Obviously you have to have a reasonable number of shares and the stock should be volatile, but perhaps not too volatile. Stocks I do this with regularly include Exom, Microsoft and Qualcom. They always go down again- and up again. In the beginning its scary, but after you've done it a few times, its just investing as usual.

I generally won't sell calls on the entire position, just in case the market really takes off. And I don't do a lot of call writing in a short period. I stagger it over the year depending on the market and the stock's price, and the price of the call.


Antonio Alvarez from PA posted about 1 year ago:

A web site with the Equity only Put to call ratio is:

http://ycharts.com/indicators/cboe_equity_put_call_ratio

Maybe the author can direct us to some other site where we can draw the EMAs over the data.


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