CBOE Put/Call Ratio

The P/C Ratio is derived by dividing the total number (volume) of option put contracts purchased by the number of option calls, for a given trading day.  The P/C Ratio measures the degree of bullishness or bearishness in the market, based on the ratio of Puts purchased to Calls purchased (i.e. Daily Put Volume/Daily Call Volume = P/C Ratio). The Chicago Board of Options Exchange calculates the P/C Ratio for all equity and index options traded in their Daily Market Statistics.  Traditionally, a P/C Ratio of .80 or greater is considered bearish.  Readings above 1.00 over a number of trading days are considered strong signs of a market bottom. 

Below 1.0, the readings are considered neutral in the .40-.50 range, and extremely bullish at readings below .30.  The lower readings are considered strong signs of a topping market nearing a reversal. Note that technicians regard extreme high or low readings as contrarian signals.  The value of the Put/Call ratio is thus in determining when sentiment extremes have been reached, as such extremes tend to give way to their opposite.  Data supplied by Market Harmonics

Put/Call Volume Ratio

One of the more significant categories is options traded on individual stocks, which is reflected in the Equity Put/Call ratio. For this chart, we apply a simple 21-day moving average to the daily Equity Put/Call ratio to create the sentiment channel.  The moving average ranges between the 0.70 and 0.50 areas, which mark respective extremes in bearish or bullish sentiment.  Other than this, the movement patterns have the same effect as described for the Total Volume P/C ratio.  What makes the Equity-only ratio significant is that it tends to reflect the sentiment of the general community of investors and speculators to a greater extent than those who trade options on indices, which are more commonly used by professionals and large investors.  In other words, it removes the index influence from the Total ratio.