by Randy Frederick 09/30/08
Another Option: Put/Call Ratios
Put/call ratios are market-sentiment statistics that have been around for quite some time and enjoy a faithful following among option traders. There are two main types of put/call ratios: one based on daily volume, and one based on open interest. Both of these statistics are available in the trading window of the StreetSmart Pro software.
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A put/call ratio is simply the number of put contracts divided by the number of call contracts. Just like volatility gauges, put/call ratios are usually considered contrarian indicators, which means that a high ratio (more puts than calls) may be considered bullish on the underlying securities, while a low ratio is considered bearish.
However, before you assume that this is always the case, it's important to know what a particular ratio you might see published is actually measuring. Put/call ratios can be based on any of the following factors:
As we'll discuss in more detail in Part II, some of these ratios do indeed seem to be contrarian, while others seem more straightforward.
Learn more about this topic in How to Track Options Volatility - Part II.
Randy Frederick is Director of Derivatives at the Schwab Center for Financial Research. To learn more about him, read his bio.
This article originally appeared on The Options Insider Web site.
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