Put/Call Ratio As an Trading Indicator

4 July 2023

Put/Call Options in the US market have been used by investors to hedge their investments in equity and other markets. For example,  when investors invest heavily in stocks,  they might want to buy some put options to mitigate their risks and vice versa.   Because of this purpose,  we often see call-and-put options being used to chart the market direction.  

We can find the daily trading of Put/Call options in the Chicago Board Options Exchange (CBOE).  This is their webpage.  We can also find many websites giving free Put/Call Ratio charts;  for example, this chart is in StockChart.

Unfortunately,  these charts are only able to tell us the present and not the future trend.  For example,  the above chart is telling us that the equity market is getting stronger because the Put/Call ratio is trending slightly downward.  It cannot tell us if this trend will continue.

Trending the Future

To look at the future trend,  we should expand the chart as shown.  We could clearly see the trend from the following chart: 

The Chart is now able to tell us not only the present trend but also the trend in the coming future.   It can also tell us roughly when to buy and hold or when to sell the equity.

For added clarity,  we could remove the daily wiggling line and then add in the 20,  50, and 200-day moving averages (MA) as shown in the following chart.  This new chart will tell when to buy or sell.  That is,  we should start to buy when the 20 and 50 MA is staying consistently below the 200 MA;  otherwise,  we should start to sell.   

The most rewarding time is when the 200-day moving average is trending downward like in early 2020.

Disclaimer:  This article is for information and educational purposes.   Readers are advised to conduct their own research and study to make their own investment decisions.