Time Frame: Short-Term | Update Schedule: Daily | Source: CBOE
Construction:
The total put/call ratio is the volume of puts divided by the volume of calls traded on individual equities on the CBOE (Chicago Board Options Exchange) on a given day.
A put is an option contract commonly used to profit on a declining stock - traders usually buy them to hedge an existing position or speculate on a stock or index they believe will decline soon. Conversely, a call is an option which gives the buyer the right to buy a stock at a certain price by a certain time, and is most commonly bought by traders who wish to profit on a stock or index they believe will quickly rise in price.
Since most of the options contracts are bought to open, and not sold to open, we can be fairly confident that most of the volume represents purchases. Generally, heavy volume in put contracts shows large-scale fear by options traders, while heavy call volume is usually a reflection of increased investor optimism regarding rising prices.
When there is a lopsided shift in volume, for example when there is heavy put buying and low call buying, the put/call ratio will be high. When an extreme is reached, this becomes a bullish contrarian indicator and we should expect higher market prices soon. Conversely, when options traders are optimistic and there is low put volume in relation to call volume, then the put/call ratio will be low and we may be near a market high.
Because the day-to-day movements in this ratio are so erratic, it's often useful to also plot a 10-day or 20-day moving average.
