CBOE Put Call Ratio

The CBOE Put-Call Ratio is a widely used indicator that measures the ratio of put options to call options traded on the Chicago Board Options Exchange (CBOE). It is used to gauge market sentiment and investor behavior in the options market.

Put options give the holder the right, but not the obligation, to sell an underlying asset at a specified price (strike price) within a specific time period. Call options, on the other hand, give the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specific time period.

The Put-Call Ratio is calculated by dividing the total volume of put option contracts traded by the total volume of call option contracts traded. It provides insights into the relative demand for put options (bearish sentiment) versus call options (bullish sentiment) in the market.

A high Put-Call Ratio indicates that there is more demand for put options compared to call options. This suggests that investors are more bearish and expect the price of the underlying asset to decline. It can indicate a higher level of fear or uncertainty in the market.

Conversely, a low Put-Call Ratio indicates that there is more demand for call options compared to put options. This suggests that investors are more bullish and expect the price of the underlying asset to rise. It can indicate a higher level of optimism or confidence in the market.

Traders and analysts use the Put-Call Ratio as a contrarian indicator. When the ratio reaches extreme levels, it may suggest a potential reversal in the market sentiment. For example, a very high Put-Call Ratio could indicate that the market is oversold and due for a bounce, while a very low Put-Call Ratio could indicate that the market is overbought and due for a correction.

It’s important to note that the Put-Call Ratio is just one tool among many used in technical analysis and should not be relied upon solely for making investment decisions. It is best used in conjunction with other indicators and analysis techniques to gain a comprehensive understanding of market sentiment and trends.