The put-call ratio is a number that helps market investors get some idea on whether market speculators expect a rise or fall in the market. The ratio is derived by dividing the number of put options traded throughout the day by the number of call options.Continue Reading
As the put-call ratio rises, investors determine that others are assuming a drop in the market. This is due to the fact that the higher the put-call ratio is, the more investors invest in market instruments that move upward in price as stock prices fall.
There are several ways in which investors use the put-call ratio to profit. As the ratio rises, there is greater incentive to purchase short positions at the beginning of the cycle. Once it nears the peak of the rise, investors look to purchase stocks to take advantage of low prices, in which case the purchase of stock at rock-bottom prices can occur. The market is seen to be a bit too bearish, and speculators at this point invest in ways that look towards the market to readjust back into the normal put-call range which is accompanied by rising stock prices. Generally, the peak of the ratio occurs when the ratio rises outside the norms of its usual trading range.Learn more about Investing