What is Put/Call Ratio?

Put/Call Ratio Definition. The Put/Call Ratio is an indicator used in technical analysis to assess market sentiment about future directions of a specific security or currency or for the entire market in general. It is calculated by dividing the number of put options by the number of call options for a particular asset or the entire market. Since investors are likely to buy put options when they believe the market will fall or buy call options when expectations are for a rise in prices, the ratio can give analysts a guide to the overall pessimism or optimism in the market. Typically, if puts dominate, it is a bearish signal, and if calls are larger, then the indication is bullish. However, this indicator does not always give a true reading, especially if holders of options are rolling over their positions to the following month over a period of time. The additional volume and timing of this type of portfolio adjustment on a material basis can distort the validity of the ratio. Contrarian investors often believe that other investors are not truly in tune with where market price behavior is actually headed. Contrarians postulate that by the time investors are focused on buying puts, the damage has already been done to prices and that a rally is actually in the making.

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