Wednesday , 24 April 2019

What Does the Put-Call Ratio Say About the Current & Future Performance of the Stock Market?

…Market sentiment, as measured by the CBOE’s put-call ratio, continues to flash strongly bullish signals.
This widely-watched indicator lags the market and may not be an entirely accurate or comprehensive gauge of sentiment but it can certainly provide an insightful look into the overall mood and level of fear in the markets at any given time.

Chart of the CBOE Put-Call Ratio - Key Stock Market Indicator Remains Strongly Bullish

Chart of the CBOE Put-Call Ratio – Key Stock Market Indicator Remains Strongly Bullish – Source: TheTechnicals.com and TradingView

What Is the Put-Call Ratio?

The put-call ratio is a simple formula comparing the overall trading volume of put options to call options.

  • Generally, put options are considered an expression of bearishness for options buyers.
  • Conversely, call options are considered an expression of bullishness for options buyers.

Of course, this is not always the case. Options can be traded for many purposes other than just speculating on market direction. Options can also be used to:

  • generate income,
  • provide insurance,
  • or hedge underlying positions

but the most basic function of calls and puts is to express sentiment.

How Is the Put-Call Ratio Typically Interpreted?

To derive a put/call ratio, simply divide the number of traded puts by the number of traded calls.

  • If there are more traded puts than calls (bearish scenario), the ratio will be above 1 and
  • if there are more traded calls than puts (bullish scenario), the ratio will be below 1.

The CBOE’s put-call ratio provides an overall view of market sentiment for U.S. stocks, ETFs, and indexes.

The Current Put-Call Ratio Chart

As shown on the chart above,

  • the big spike far above 1 in late December corresponded with the disastrous drop in the markets back then. Since then, though, the spikes have been much smaller as the market has recovered rapidly.
  • Currently (as of the market close on 4/8/2019), the ratio is well below 1 and near the lows of the past 8-9 months.

What Could This Low Put-Call Ratio Mean?

Despite continued market worries about a global economic slowdown and potential recession, investor sentiment appears exceptionally healthy at the moment. Of course, this complacency could change at a moment’s notice but the highly bullish sentiment that we’re seeing now bodes well for a full market recovery towards record highs and above.

Editor’s Note: The above excerpts* from the original article have been edited ([ ]) and abridged (…) for the sake of clarity and brevity. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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