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The Importance of Put/Call Ratios
Has your trading system placed you on the profit side of the market? Here's a tip that might help you get and stay in the black: If the put/call ratio for a given market is greater than one (>1.0), the market is poised to advance. If the ratio is less than one (<1.0), the market is likely to decline. Plainly stated, when the put/call ratio is high and rising, the underlying market also rises. When the ratio is low and falling, so falls the underlying market.
History has shown an overwhelming tendency for the put/call indicator to move in concert with the markets' directional movement. We believe this is so because traders want protection against market reversals, even when they are convinced of a future market trend. Some traders use stops for protection, but others purchase the opposite option as an alternative. So the trader who is bullish on cattle might buy a long futures contract and also a put option. This apparently bearish entry into the options market gives rise to the contrarian result. We haven't seen this argument advanced elsewhere, but we believe it explains the contrarian phenomenon.
Trading in the direction of the put/call indicator is likely to improve the quality of the buy or sell signals offered through your trading software, and may easily improve your chance of success.
CSI's is the only world source of this valuable statistic. Because one of our missions is to help our customers screen their data to avoid entering into a losing trade, we encourage everyone to view this important data. We recommend that trading system designers include Put/Call ratio studies in future systems to take advantage of these data series. If any developer would like to add this capability, we can help with the installation, and perhaps supply historical options data on various futures markets. For those traders who don’t have the benefit of specially designed software, you may screen proposed trades yourself by capturing this rare (but extremely important) statistic directly from CSI.
CSI's June 2005 issue of the CSI Technical Journal explains the merits of the put/call statistics and several other important technical data items that will help in your trading pursuits.
Sincerely,
Bob Pelletier
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Market Correlation Studies
