Rays of Hope from Some Put/Call Ratio Extremes
Key points:
- Put/Call data can serve as a useful weight of the evidence tool when it reaches an extreme
- Extreme readings in put/call data offer a window into the minds of speculative traders - who often act based on emotion, and therefore tend to be wrong when they swing heavily in one direction or the other
- The OEX Put/Call Ratio and ROBO Put Call Ratio flashed favorable weight of the evidence signals during the recent market sell-off
The OEX Open Interest Ratio recently plunged
OEX is shorthand for the S&P 100, an index made up of the 100 largest companies in the S&P 500. Open interest is the total number of outstanding option contracts. Open interest increases with opening transactions and decreases with closing transactions. Someone buying a call to open (a bullish position) would increase open interest by one, and someone selling a call to open (a bearish position) would also increase open interest by one. The open interest indicator divides the total put open interest by the total call open interest. As more put contracts are opened (and/or call contracts are closed), the indicator rises; as put contracts are closed (and/or call contracts are opened), the indicator falls.
I view this indicator as a "weight of the evidence" tool rather than a trading signal generator. The chart below highlights all dates when the indicator value

