{"id":197397,"date":"2023-10-09T12:15:00","date_gmt":"2023-10-09T16:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=197397"},"modified":"2023-10-09T21:22:47","modified_gmt":"2023-10-10T01:22:47","slug":"what-the-put-call-ratio-might-be-telling-us","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/options\/what-the-put-call-ratio-might-be-telling-us\/","title":{"rendered":"What the Put\/Call Ratio Might be Telling Us"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">After last week\u2019s whipsaw action in both bonds and stocks, I began to see some commentary about how an extreme reading in the put\/call ratios presaged Friday\u2019s stunning rally in equities.&nbsp;On the surface, it\u2019s hard to disagree with that observation \u2013 the ratio indeed reached an extreme on Wednesday \u2013 but the track record of that contrary indicator is far from perfect.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The rationale for the put\/call ratio to be considered a contrary indicator is quite sound.&nbsp; When markets reach extreme levels of sentiment \u2013 whether bullish or bearish \u2013 it can be typical for traders to bet heavily on one side or the other.&nbsp; When markets are bearish, it is reasonable to expect traders to favor puts over calls, and vice versa when markets are bullish.&nbsp; If those preferences reach an extreme, it can indicate that the move is excessive or reaching a level of exhaustion.&nbsp; Thus, high readings of the put\/call ratio are considered bullish signals and low readings are considered bearish.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">One problem with using put\/call indicators is that there is little consensus about which one to use.&nbsp; Some prefer to use exchange specific measures (e.g. Cboe only) while some focus only on indices or stocks.&nbsp; My preferred measure is the US Composite Put\/Call Ratio.&nbsp; This is a broad measure, including equity and index options traded on all exchanges.&nbsp; It seems to be the least \u201ccherry-picked\u201d data of the bunch.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another issue is that the ratios can be very volatile on a daily basis.&nbsp; I prefer to smooth out the extremes with a 21-day moving average.&nbsp; That is roughly the number of trading days in a given month, so putting daily fluctuations into perspective against a medium-term trend can be quite helpful.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-1-year-chart-composite-put-call-ratio-white-21-day-moving-average-magenta-spx-orange\"><strong><em>1-Year Chart, Composite Put\/Call Ratio (white), 21-day Moving Average (magenta), SPX (orange)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"484\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture2-1.png\" alt=\"1-Year Chart, Composite Put\/Call Ratio (white), 21-day Moving Average (magenta), SPX (orange)\" class=\"wp-image-197400 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture2-1.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture2-1-700x362.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture2-1-300x155.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture2-1-768x397.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/484;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">When we look at the put\/call ratio over the past year, it is apparent that Wednesday\u2019s ratio was among the highest we\u2019ve seen over that period.&nbsp; In fact, it exceeded the spike that occurred at the worst of the March banking crisis, though it was below the extreme levels seen at the end of last year.&nbsp; Both proved to be buying opportunities.&nbsp; Does Wednesday\u2019s spike signal a similar opportunity?&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Traders certainly seemed to think so on Friday, but the experience beyond the past year is decidedly mixed.&nbsp; When we look at a 5-year chart, for example, we see that in 2021 we saw persistently low levels of the ratio \u2013 remember, that was a year when the public embraced call buying in an unprecedented manner \u2013 punctuated by downward spikes, yet none proved to be a decent time to sell stocks.&nbsp; Interestingly, the decline that began in January 2022 was accompanied by higher levels of the ratio.&nbsp; During 2022 we saw two spikes of similar magnitude to last week\u2019s, one in early June, one in late September.&nbsp; The former move was a good opportunity for traders as the S&amp;P 500 (SPX) moved higher from mid-July through mid-August.&nbsp; That rally evaporated, however, leading to the next spike in late September.&nbsp; SPX did indeed form a lasting bottom a couple of weeks later.&nbsp; (Interestingly, SPX did not exceed that August high until June of this year, and we are trading at nearly identical levels today.)<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-5-year-chart-composite-put-call-ratio-white-21-day-moving-average-magenta-spx-orange\"><strong><em>5-Year Chart, Composite Put\/Call Ratio (white), 21-day Moving Average (magenta), SPX (orange)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"936\" height=\"518\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture1-7.png\" alt=\"5-Year Chart, Composite Put\/Call Ratio (white), 21-day Moving Average (magenta), SPX (orange)\" class=\"wp-image-197399 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture1-7.png 936w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture1-7-700x387.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture1-7-300x166.png 300w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2023\/10\/Picture1-7-768x425.png 768w\" data-sizes=\"(max-width: 936px) 100vw, 936px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 936px; aspect-ratio: 936\/518;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In those cases we see that the spikes preceded market rallies, but not immediately, and that those rallies either proved to be false (as in July-August 2022) or followed by some rocky weeks before truly powering upward (October-December 2022)<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For those who want to look back a bit further, <a href=\"\/campus\/traders-insight\/securities\/options\/is-the-put-call-ratio-telling-us-anything-meaningful\/\">we did a similar analysis<\/a> of the 2017-2019 period in a piece published in September 2022.&nbsp; <a href=\"\/campus\/traders-insight\/securities\/options\/is-the-put-call-ratio-telling-us-anything-meaningful\/\">To summarize<\/a>:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>The ratio was an extraordinary contrary indicator prior to \u201cVolmageddon\u201d \u2013 the sharp drop in stocks and blow-up in volatility that occurred in February 2018.&nbsp; Yet it failed miserably in October of that year, the time that might be the closest parallel to our own.&nbsp; We see the ratio spike at that time, only to abate just as SPX plunged in December.&nbsp; We then see it spike again just as the selloff was ending and stock prices began a substantial bounce.<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><a href=\"\/campus\/traders-insight\/securities\/options\/is-the-put-call-ratio-telling-us-anything-meaningful\/\">Our conclusion from our September 2022 piece<\/a> remains in effect today:<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><em>The put\/call ratio can be a very useful tool \u2013 one that I consult often.&nbsp; But its messages are far from foolproof, and its false messages can be costly.&nbsp; Use with care.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>After last week\u2019s whipsaw action in both bonds and stocks, I began to see some commentary about how an extreme reading in the put\/call ratios presaged Friday\u2019s stunning rally in equities.<\/p>\n","protected":false},"author":4,"featured_media":184283,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[6,19,8,9,26,3],"tags":[1401,1926,1400],"contributors-categories":[13576],"class_list":["post-197397","post","type-post","status-publish","format-standard","has-post-thumbnail","category-north-america","category-options","category-region","category-securities","category-text-articles","category-traders-insight","tag-call","tag-options","tag-put","contributors-categories-interactive-brokers"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What the Put\/Call Ratio Might be Telling 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