Equity put/call ratio

The equity put-call ratio (PCR) is a widely used market sentiment indicator derived from options trading. It measures the volume (or open interest) of put options relative to call options in the equity market.

  • Put options: Represent bearish bets (expecting a price decline).
  • Call options: Represent bullish bets (expecting a price increase).

Why Is the Equity Put-Call Ratio Important?

The PCR serves as a contrarian sentiment indicator:

  • Low PCR (more calls than puts) β†’ Indicates excessive optimism (potential overbought conditions).
  • High PCR (more puts than calls) β†’ Indicates excessive pessimism (potential oversold conditions).

Institutional traders and analysts monitor PCR to gauge market sentiment, potential reversals, and risk appetite.

Interpretation of Movements
A. High Put-Call Ratio (Above 1.0) β†’ Bearish or Contrarian Bullish?
  • A high PCR suggests that traders are heavily buying puts, expecting a market decline.
  • However, extreme pessimism can signal a contrarian buying opportunityβ€”if too many investors are hedging against a fall, it might indicate that selling is overdone.
  • Example: PCR spikes above 1.2–1.5 during extreme fear (e.g., March 2020 COVID-19 crash).
B. Low Put-Call Ratio (Below 0.7) β†’ Bullish or Contrarian Bearish?
  • A low PCR suggests excessive call buying, which typically indicates strong bullish sentiment.
  • However, excessive optimism often leads to overbought conditions, signaling a potential correction.
  • Example: PCR below 0.5 has historically preceded short-term market tops.
C. Neutral Put-Call Ratio (~0.7 to 1.0)
  • Indicates balanced sentiment, often seen in stable or consolidating markets.
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Equity Put/Call Ratio Still Not at Panic Levels

The 10-DMA of the equity put/call ratio (black/red line), after plummeting at the end of January to the lowest since July (which was the least since Apr β€˜22), has since rebounded to the highest since Sept, consistent with investors continuing to start to look more seriously for downside protection but still well below β€œpanic” levels.

When it’s increasing it normally equates to a consolidation in equities and increase in volatility and vice versa.



https://x.com/neilksethi/status/1898473799617536152/photo/1
https://en.macromicro.me/charts/449/us-cboe-options-put-call-ratio

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