Click here for chart






Each weekday night by 7:00 PM EST



The equity 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 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 they believe will quickly rise in price. 


Since most equity 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.


The equity put/call ratio is most easily computed using data from the Chicago Board Options Exchange (CBOE).  The ratio is computed simply:


Equity put/call ratio = equity put volume / equity call volume


The chart below is a snapshot of the CBOE website for February 7th, 2003:



We can see here that there were 241,263 puts traded on the CBOE on February 7th, and 344,830 calls.  Therefore, the CBOE equity put/call ratio would be as follows:



Equity put/call ratio = equity put volume / equity call volume = 241,263 / 344,830 = .70



Phrased another way, there were 70 puts traded that day for every 100 calls.


Because the day-to-day movements in this ratio are so erratic, we follow them on a 10-day and 21-day moving average basis, which corresponds to the most recent two-week and one-month period (trading days).



Put/call ratios tend to show secular trends depending on the market environment (i.e. low put/call ratios are common during a bull market and high put/call ratios are common during a bear market), so there is no set level that can be considered extreme (not even the "1.0" level that is commonly believed to show excessive pessimism). 


On the chart, the green and red bands show extremes in the most recent trend of the indicator.  When the put/call ratio exceeds one of those levels, then a notable event has occurred.  The most effective signals occur when the ratio is high and the market is in an overall uptrend (buy signal), or when the ratio is low and the market is in a downtrend (sell signal). 


The chart below shows an occurrence of the total put/call ratio violating its upper standard deviation band in July 2002.  The market had been in a severe downtrend with no letup in sight.  Finally, after breaking several important technical levels, options traders began to fear the worst - a market crash - and put volume exploded relative to call volume.  This pushed the equity put/call ratio above its upper standard deviation band, and signified to us that there was panic in the air.  The market bottomed a few days later.



Although this is a real example and points out the value of following this information, we do not mean to intimate that the market ALWAYS finds a low when the equity put/call ratio violates its upper band, or peaks immediately after the ratio exceeds its lower band.  It is a guideline and not a trading system unto itself.


For purposes of the Indicator page, the daily readings and 10-day average are used.


  Since 1995 Since 2000
Mean 0.52 0.59
St. Dev.* 0.15 0.15
Maximum 1.21 1.21
Minimum 0.24 0.31
  Since 1995 Since 2000
Mean 0.53 0.60
St. Dev.* 0.12 0.12
Maximum 0.92 0.92
Minimum 0.34 0.35


*Standard Deviation.  See below for a description of standard deviation for the daily put/call reading...


68% of readings (1 standard deviation) should be between .44 and .74

95% of readings (2 standard deviations) should be between .29 and .89

99% of readings (3 standard deviations) should be between .14 and 1.04


In other words, we should expect a reading under .14 or over 1.04 only between 2-3 times per year.  Since such a reading would be highly unusual, it suggests that we are seeing an unsustainable trend.  These figures assume a normal distribution curve, which is not necessarily true in this case.  Since 1995, this data has shown a relatively significant skew (few very small readings but more significantly large readings).  However, recently this skew has begun to lessen as the mean has increased, making the distribution more normal.



Chicago Board Options Exchange (www.cboe.com)


2005  Sundial Capital Research, Inc.  All Rights Reserved.