Understanding Put-to-Call Ratios - dummies

By Joe Duarte

The late Martin Zweig is credited with creating put‐to‐call (P:C) ratios, deriving them by simply dividing put contract volume by call contract volume. Zweig predicted the 1987 stock market crash on national television on the Friday before “Black Monday” and made money by being short the market. A wide variety of such ratios are now available to you.

And although alert levels have changed over the years, the emotion they signal remains the same: fear.

A P:C ratio focuses on bullish and bearish action taken by various market participants. Many are also contrarian measures, meaning the implications for the indicator are opposite of market sentiment. When everyone is excessively bearish, conditions are right for an upside reversal — a rally. And when everyone is exuberant about market prospects, the odds of a significant decline are higher. You interpret P:C ratio readings the following way:

  • Extremely low readings are bearish.

  • Extremely high readings are bullish.

Now for the good stuff. A select list of ratios using call and put volume follows, with information about the indicator construction and readings:

  • CBOE equity put/call ratio: Total volume for all stock options trading on the CBOE. Readings from the former option volume leader are now less comprehensive given significant gains from the International Securities Exchange (ISE). In the past, readings above 0.90 suggested increased fear in the market and oversold conditions. More recently, readings above 0.80 reflect growing fear.

  • CBOE index only put/call ratio: Total volume for all index options ­trading on the CBOE. This measure includes SPX and OEX index volume, which remain important market barometers. A distinct aspect of this indicator is the type of trader it reflects — the index options trader is considered more sophisticated and on target with market moves.

    As a result, high readings reflect pending bearishness for the market. Readings above 2.4 reflect approximately three standard deviations (SD) above the mean and have occurred immediately before short‐term and intermediate term tops.

    Drops in the market typically happen faster than rallies.

  • ISE Sentiment Index (ISEE): This tool is actually a call:put ratio, with two other important distinctions noted by the ISE:

    • It focuses on new buys only, versus total volume, which reflects short sellers too.

    • It excludes market maker and other professional trader activities, leaving customer activity only (money managers and retail).

    • Because this index is an inverse of the typical ratios, low readings coincide with extreme bearishness and thus are interpreted as ­predictive of market advances on a contrarian basis. Since 2002, readings less than 85 are 2SD below the average and have coincided with short‐term and intermediate‐term bottoms. You can find the ISE indicator, updated every 20 minutes during the trading day.

  • ISE index and ETF put/call ratio: Total volume for all index and ETF options trading on the ISE. Consider augmenting the CBOE index‐only ratio with this tool to round out your assessment of broad hedging ­activity.

Three keys to getting the most from all these sentiment tools are

  • Knowing basic indicator construction information

  • Understanding the historical extremes and implications for the tool

  • Recognizing significant market changes and impact on indicator data

If you’re zeroing in on the sentiment for individual security, be sure to capture the data from all exchanges that trade options for that underlying. Rather than a specific reading, identify atypical readings for the data by calculating the average value and standard deviations, and then add lines to identify extreme levels.

Many widely followed ETFs and their options trade until 4:15 p.m. Eastern time — be sure to track the correct closing time and price.

The figure provides a daily chart for the S&P 500 exchange‐traded fund (SPY) and its put/call ratio with a five‐day moving average and a +1SD line.


When the 5‐day simple MA for the SPY put/scall ratio reached more than +1SD, a near‐term bottom was signaled six of eight times.

Indicators may behave differently during bull and bear markets and even during different stages of bull or bear markets (early, mid, late). When using a new indicator, check its performance during similar periods in the past.

You can also use these SD lines when identifying extremes for exchange data, particularly when market changes impact volume.