The put-call ratio is a popular tool specifically designed to help
individual investors gauge the overall sentiment of the market. The ratio is calculated by
dividing the number of traded put options by the number of traded call options. As this ratio increases, it can be
interpreted to mean that investors are putting their money into put options
rather than call options. An increase in traded put options signals that
investors are either starting to speculate that the market will move lower, or
starting to hedge their portfolios in case of a sell-off.
An increasing ratio is a clear indication that
investors are starting to move toward instruments that gain when prices decline
rather than when they rise. Since the number of call options is found in the
denominator of the ratio, a reduction in the number of traded calls will result
in an increase in the value of the ratio. This is significant because the
market is indicating that it is starting to dampen its bullish outlook. ,.....
