Put-Call ratio

The put-call ratio is widely used to signal market direction, and investor motivations.

A “put” or put option is a right to SELL an asset at a predetermined price. A “call” or call option is a right to BUY an asset at a predetermined price. Thus, and excess of put options compared to calls hits to a larger motivation to sell, or a bearish market.

An extremely high put-call ratio means the market is extremely bearish. This needs to be considered with care, as in contrarian strategies this type of extreme Put-Call ratios can be used as signals for a soon to appear reversal.

Figure 6.12: Put-Call ratio