Weird Wednesdays for Put Call Ratio
It’s Weird Wednesday, and you know what that means: the craziness of the options markets has taken a turn for the weird. This week we are taking a look at the constantly shifting Put Call Ratio (PCR).
What is the Put Call Ratio? Essentially, the Ratio is a measure of how many put options are being purchased relative to how many calls are being purchased. It’s also sometimes called the Equity Put Call Ratio (though it does take into account index options as well). If the ratio is low, it means that puts (the right to sell a stock) are dominating the market, while if the ratio is high, calls (the right to buy a stock) are dominating the market.
Understanding the PCR is, to some extent, understanding investor sentiment. Put options suggest that investors are bearish (anticipating a drop in the stock’s price) and call options suggest that they are bullish (anticipating an increase). PCR is used as an indicator of investor sentiment across the whole market. When the ratio is low, it suggests that sentiment is bearish, when it is high it suggests that sentiment is bullish.
The PCR can also help investors to determine whether or not they should enter a particular trade. When the PCR is low, it could indicate that the stock, index, or commodity is due for a pullback. Similarly, when the PCR is high, it could indicate that the stock is due to appreciate in the near future.
However, the PCR is just one measure of sentiment in the markets and should never be used in isolation. It is important to take other indicators into account, such as volume, price action, and other technical indicators, to make sure that you have a well-rounded understanding of the markets.
Furthermore, the PCR is only one small part of the technology frenzy known as Weird Wednesdays. With so much information about options trading out there, it’s easy to feel overwhelmed, so it pays to take it one step at a time and start with the basics. Take the time to understand the PCR before moving onto more complex topics and utilizing more sophisticated strategies. After all, it’s your money that’s on the line.