Put Call Ratio

The Put Call Ratio (also known as EPCR) is an indicator of financial market spikes and trends. This put call ratio is analyzed by investors because it measures the Daily Volume of the world’s largest options exchange, which can give an indication of market direction. The put call ratio almost always is below 1.00, indicating that more calls are traded than puts.

Put Call Ratio – Bull Market

Although the put call ratio is typically below 1.00, spikes in the put call ratio have in the past signaled a “panic” that usually preceded market rallies. Since the market peaked around October 2007, the trend has become more Bearish which affects the put call ratio. The put call ratio during Bull Markets often spiked above 1.00.

Put Call Ratio – Spikes

Currently, the put call ratio is not spiking above 1.00, even though financial markets are on a continuing on a downward trend. In fact, the market is hitting multi-year lows and investors are trading more calls than puts. Option traders evidently are feeling complacency since more calls than puts are traded, thus affecting the put call ratio. Likely reasons are that market performance is indicating a major market bottom is close so put trading is at higher levels than calls, which affects the put call ratio.

Put Call Ratio – Market highs

Despite the market currently hitting multi-year lows, highs occurred around October 2007, showing spikes in the put call ratio. Since then, there have been three major spikes where the put call reading was above 1.15. These spikes came in March, September, and November 2008. The put call ratio shows how the market fared after these extreme readings.

Put Call Ratio – S&P 500

Since the bear market began in 2007, analysts have wondered why would put call ratios spike three times? The answer is that the spikes have not been solid as a buy signal like they are in a bull market. However, each spike did mark a market reversal and likely trend change in put call ratio.

Put Call Ratio – Summary

While put call ratios have spiked in the past, it is of concern that the readings are low along with the downtrend in the financial markets. When the market starts to trend upward again, the ratio most likely will spike again. If this happens, it might be an indicator to the market trend of put call ratios.