Put options, as we know, are contracts for selling underlying securities at a strike price. The opposite is true for call options which are contracts for buying underlying securities for pre-determined rates.
By understanding what is a put call ratio, you’d be able to identify bullish and bearish trends in the market. You can use Thinkorswim put call ratio functionality on charts to better visualize the market trend.
For now, let’s understand put to call ratios and how they affect you.
How to Read Put Call Ratio?
To answer “What is the put call ratio” — it is the ratio between the demand for put (sell) and call (buy) options. But to better understand how things work, we must understand “how to read put call ratio?”
So, here’s how it works.
If the put-call ratio is rising, i.e., if people are buying more put options, shows that the market is becoming bearish. You can identify a bearish trend if the put-call ratio, let’s say, is 0.7 and climbing higher (going over 1.0).
However, if the ratio drops, let’s say from 0.7 to 0.5, this reflects that people are buying more call options (compared to put options). This suggests a bullish trend in the market movement.
Understanding Total Put Call Ratio
So, what do the numbers actually mean?
Let’s explore in this comprehensive put call ratio explained section! “1” refers to equilibrium in the put call ratio index. This means that an equal number of traders are buying both call and put options for a security/stock.
If the ratio climbs (potentially even going over 1.0), it signifies that an increasing number of people are buying put options. However, when the ratio drops, the opposite is true, i.e., more people are buying call options.
The total put call ratio indicator Thinkorswim lets us see which option (put or call) has been bought in higher volumes. If it is more than 1, then there are more put options out there than call options, and vice versa.
Importance of Put Call Ratio in Trading
Tracking the put call ratio live is an essential part of contrarian trading strategies.
If you predict the market’s decision, you can make informed decisions in time. In the case of stocks with high put call ratio, for instance, one can say that the trend is bearish, but it is bound to swing into the bullish lane, sooner or later.
Using this information, traders can make their trade decisions.
However, jumping to conclusions via the put to call ratio today would be unwise. Generally, traders compare live put-call ratios with the prevalent average to see how the market is performing.
Stocks with High Put Call Ratio
Now that you know what does put call ratio mean, let’s see how high put-call ratios in stocks can affect your trading strategies. When a given stock has a high put-call ratio, and you predict a reversal of the trend towards a bullish “mood,” it would be best to buy call options in time.
Some examples of stocks with high put call ratios are as follows:
- CWK — Cushman & Wakefield plc Ordinary Shares
- INN — Summit Hotel Properties, Inc.
- G — Genpact Limited
- ESI — Element Solutions Inc.
- BF.B — Brown Forman Inc Class B
As a contrarian trader, you must first spot a trend shift before making a decision.
Wondering “What is a good put call ratio?”
Most traders consider 0.7 to be the ideal basis for analyzing trend shifts.
Where to Find Put Call Ratio for a Stock
Wondering “Where to find put call ratio for a stock?”
Simply divide the total buys for puts by that of calls.
But you don’t have to do so manually.
Using the total put call ratio for stocks and comparing it with the general average for the same can help you understand the “mood” of the market. Contrarian traders use this data to make their bets against the prevalent market trend before it shifts in their favor.
And that’s a wrap; good luck with your contrarian trading!
