January 30, 2004

The Put/Call Ratio

Thought I'd post this subscriber question about the put/call ratio. It doesn't measure options prices, but it does measure the ratio between put buyers and call buyers...and as the subscriber points out...is also a useful measure of sentiment. Hi Dan, Although the VIX is showing little fear in the market right now, the Index put call ratio seems a little out of whack to me. The following is from the CBOE market summary for today. CBOE Market Summary for 01/27/2004 Total Put/Call Ratio : 0.87 Index Put/Call Ratio : 2.26 Equity Put/Call Ratio: 0.64 So it looks like "investors" are using the indexes to hedge rather than the equities directly. What's your take on this? Sounds right to me. Investors, and institutions, are making fewer bullish/bearish bets on single securities and making more on entire markets. At extremes of over or undervaluation, like we have now, this makes sense to me. Unless you can spot an obvious case of under or over valuation in a single security....the risk doesn't justify the reward. Incidentally, the put/call ratio declined yesterday, according to CBOE. But the bulk of the decline was in index puts. Lots of folks taking a bearish position Weds. Fewer yesterday. But still more put buyers than call buyers. Total Put/Call Ratio: 0.80 Index Put/Call Ratio: 1.82 Equity Put/Call Ratio: 0.64


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