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Open Interest and Call/Put Ratio

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The put-call ratio is calculated by dividing the number of traded put options by the number of traded call options.

A put-call ratio of 1 indicates that the number of buyers of calls is the same as the number of buyers for puts. However, a ratio of 1 is not an accurate starting point to measure sentiment in the market because there are normally more investors buying calls than buying puts. So, an average put-call ratio of 0.7 for equities is considered a good basis for evaluating sentiment.

In general:

  • A rising put-call ratio, or a ratio greater than 0.7 or exceeding 1, means that equity traders are buying more puts than calls. It suggests that bearish sentiment is building in the market. Investors are either speculating that the market will move lower or are hedging their portfolios in case there is a sell-off.
  • A falling put-call ratio, or below 0.7 and approaching 0.5, is considered a bullish indicator. It means more calls are being bought versus puts.

The put-call ratio can be an indicator of how the market views recent events or earnings. A ratio at either extreme suggests an overly bearish or overly bullish sentiment.

The data used to calculate put-call ratios are available through various sources, but most traders use the information found on the Cboe Options Exchange website.

 

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Posted on

October 31, 2022

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