Put and Call Ratios and Option Sentiment

PUT/CALL RATIOS

Volume figures for the options markets are used essentially the same way as in futures arid stocks-that is, they tell us the degree of buying or selling pressure in a given market. Volume figures in options are broken down into call volume (bullish) and put volume (bearish). By monitoring the volume in calls versus puts, we are able to determine the degree of bullishness or bearishness in a market. One of the primary uses of volume data in options trading is the construction of put/call volume ratios. When options traders are bullish, call volume exceeds put volume and the put/call ratio falls. A bearish attitude is reflected in heavier put volume and a higher put/call ratio. A very high ratio signals an oversold market. A very low ratio is a negative warning of an overbought market.

COMBINE OPTION SENTIMENT WITH TECHNICAL

Options traders use open interest and volume put/call figures to determine extremes in bullish or bearish sentiment. These sentiment readings work best when combined with technical measures such as support, resistance, and the trend of the underlying market. Since timing is so crucial in options, most option traders are technically oriented.