Posted in Finance, Accounting and Economics Terms, Total Reads: 300
Definition: Put Call Ratio
Put Call Ratio is a ratio of the volumes of put options traded to call options traded. The ratio tells us whether the market is going the bull way or the bear way. If the put volume is more as compared to call, it means bear and vice versa.
Put Call Ratio=Put Trading Volume/ Call Trading Volume
The average value of the put-call ratio is generally not 1.00 due to the reason that equity options traders and investors most often buy more calls than puts. Thus, the average ratio is time and again far less than 1.00 (typically around 0.70) for stock options.
Normally, a lower reading of 0.6 of the ratio indicates a bullish sentiment in the market as they have bought more calls. On the other hand, a higher reading of 1.02 of the ratio reflects a bearish sentiment among investors. However, the put/call ratio is used as a contrarian indicator, so that a reading above 1.0 is actually considered a bullish signal, and below 1.0 to be a bearish signal.