Glossary
Put-call ratio
The volume (or open interest) of put options divided by that of calls, read as a gauge of how bearish or hedged options traders are.
The put-call ratio divides the number of put options traded by the number of call options traded over the same period. Since puts gain when prices fall and calls gain when they rise, the ratio is a rough snapshot of how defensive options traders are. Market watchers use it mainly as a Market sentiment gauge, and often read it in a contrarian way: extreme fear can mark a low, extreme optimism a high.
How it works
The same calculation can use Open interest, the number of contracts outstanding, instead of daily volume. Several versions are published: for a single stock, for all equity options, for index options, and a total that combines them. Index options are used heavily for hedging, so index ratios usually run higher than equity-only ratios.
How it is read
- Contrarian extremes. A spike in the ratio means many traders are buying protection or betting on declines. Contrarians argue that once fear is that widespread, much of the selling may already have happened. A very low ratio suggests complacency.
- Relative, not absolute. What counts as "high" depends on the version and has shifted over time, so analysts compare a reading with its own recent range or a moving average.
- Smoothing. Daily readings are noisy. A 5- or 10-day average is more common for signals.
Limits to keep in mind
Volume counts both buyers and sellers, so a put trade can be a bearish bet, a hedge on a long portfolio, or someone selling puts to collect premium. Large institutional hedges can swamp the ratio on any given day. It is best used alongside other gauges, such as the VIX and market breadth, rather than as a standalone timing signal.