The ratio of call / put options is the ratio of trading volumes on put and call options on a single underlying asset. Either the ratio of open interest on these options. Commonly used as an indicator of the market situation.
The information used by professionals only just a few years ago, now is available for almost every investor via the Internet. With the help of technical indicators the forecast of the market behavior is made, so as to determine at what point the stock or market index will rise or vice versa – will fall. If we knew exactly these points, the profit would be unimaginable, so there is an incentive for investors to calculate using technical analysis methods, where these points are expected to be. Of all the technical indicators, the ratio, which is the same technical indicator PUT-CALL Ratio, is probably the most well-known.
From a mathematical point of view, the calculation of the indicator PUT-CALL Ratio is very simple. It is the ratio of the total volume of PUT contracts, divided by the total number of CALL contracts traded on the Chicago Board Options Exchange (CBOE).
PUT-CALL Ratio = Total number of PUT contracts on CBOE/ total number of CALL contracts on CBOE
When interpreting this indicator, it is said that the recession threatens the market when PUT-CALL Ratio crosses the lower level, and vice versa. The explanation is quite simple: the majority of option speculators are unsophisticated and are typically tempted to buy CALL options when the market fell down, and vice versa – to buy PUT options when the market is on the rise locally.
When trading in the currency market there is an important rule: to trade profitably, a trader should always be in the minority. This means that you cannot be a part of the market crowd – on the contrary, you must always go along with the market sharks.
The crowd always loses. With this in mind, the indicators of market sentiment are created. It is based on the records of actual (not a tick one) volume of trade and you can see which amounts are invested in the purchase of foreign currency, and which are invested in its sale.
For example, the market has clearly delineated the replacement of the bearish trend by a bullish one. By this time, insiders (people who possess insider information) have already entered the market at the time of the fracture, followed by experienced traders, managed to identify the first signs of change in the trend. When the trend movement is picked up by the crowd, it has already passed half of its move, and even more. At this point, the ratio of buyers and sellers is about 50:50. But the higher the price is taken, the fewer sellers and the more buyers remain, the ratio becomes approximately 30:70.
It is too late to enter the market by now; just an inexperienced part of traders does it. Finally, the ratio reaches the strap 20:80. This is the moment when insiders close their deals on buy and open on sell. Thus, they again become a minority. Followed, capturing the moments of fracture, experienced traders fix the income. The trend unfolds, the bulk of traders gradually enters it, and the cycle repeats.
That’s all for now. Got any questions? Just ask the expert!