The put/call ratio is one of the most popular sentiment indicators among traders. By measuring the relative trading activity in put options versus call options, it reveals whether market participants are positioning for a decline or a rally. Understanding how to interpret this indicator can give you a significant edge in timing your trades.
What is the Put/Call Ratio?
The put/call ratio (PCR) divides the number of put options traded by the number of call options traded over a specific period. Since puts are primarily used for bearish bets or hedging, and calls for bullish bets, the ratio reflects the overall sentiment of options traders.
Formula: Put/Call Ratio = Put Volume / Call Volume
Types of Put/Call Ratios
CBOE Total Put/Call Ratio
This includes all options traded on the CBOE, covering both equity and index options. It is the most comprehensive measure but can be noisy due to institutional hedging activity.
Equity Put/Call Ratio
This measures only individual stock options, excluding index options. Many traders prefer this version because it better reflects speculative sentiment without the distortion from institutional hedging.
Index Put/Call Ratio
This tracks only index options (SPX, SPY, etc.). It tends to run higher than the equity ratio because institutions frequently use index puts for portfolio hedging.
Typical Reading Ranges
- Total PCR: Normal range 0.80 to 1.10
- Equity PCR: Normal range 0.50 to 0.80
- Index PCR: Normal range 1.00 to 1.50
How to Interpret the Put/Call Ratio
Basic Interpretation
- High PCR (above normal): More puts being traded, indicates bearish sentiment
- Low PCR (below normal): More calls being traded, indicates bullish sentiment
- Neutral PCR: Balanced sentiment, no strong directional bias
Contrarian Application
The put/call ratio is primarily used as a contrarian indicator. When everyone is bearish (high PCR), the market is often near a bottom. When everyone is bullish (low PCR), the market may be topping.
Contrarian logic: Extreme bearishness means most selling has already happened. Extreme bullishness means most buying has already happened. Either extreme often precedes a reversal.
Key Levels for the Equity Put/Call Ratio
- Above 1.00: Extreme fear, often near market bottoms (bullish signal)
- 0.80 to 1.00: Elevated fear, cautious sentiment
- 0.60 to 0.80: Normal range, neutral sentiment
- 0.50 to 0.60: Elevated optimism
- Below 0.50: Extreme complacency, often near market tops (bearish signal)
Historical Extreme Example
In March 2020, the equity put/call ratio spiked above 1.20 as panic gripped markets during the COVID crash. This extreme reading indicated capitulation and preceded one of the strongest rallies in history. Traders who recognized the contrarian signal had an opportunity to buy near the bottom.
Trading Strategies Using the Put/Call Ratio
Strategy 1: Contrarian Reversal Trading
Look for extreme readings and position against the crowd:
- Monitor the 5-day or 10-day moving average of the equity PCR
- When the moving average spikes above 0.90, start looking for long entries
- When it drops below 0.55, consider reducing long exposure or hedging
- Combine with price action for entry timing
Strategy 2: Trend Confirmation
Use PCR to confirm existing trends:
- In uptrends, PCR should be declining or staying low (bullish confirmation)
- Rising PCR during an uptrend suggests the rally may be weakening
- In downtrends, PCR should be rising (bearish confirmation)
- Falling PCR during a downtrend may signal a bottom is forming
Strategy 3: Options Expiration Analysis
PCR can be especially useful around monthly options expiration:
- Extreme PCR readings into expiration can indicate potential gamma squeeze setups
- Very low PCR with heavy call positioning may lead to dealer hedging that pushes prices higher
- Very high PCR may indicate put-related support levels
Weekly vs Daily PCR
Daily PCR can be volatile and misleading. Many traders smooth the data with a 5-day or 10-day moving average. Others compare current readings to the 20-day or 50-day average to identify relative extremes.
Combining PCR with Other Indicators
The put/call ratio works best when combined with other sentiment and technical tools:
- VIX: High PCR + high VIX = extreme fear (stronger contrarian signal)
- Market breadth: Confirms whether sentiment aligns with underlying participation
- Price support/resistance: Extreme PCR at key technical levels increases signal reliability
- AAII sentiment survey: Provides additional sentiment confirmation
Limitations and Pitfalls
- Hedging distortion: Institutional hedging can inflate put volume without bearish intent
- Zero-day options: Growth in 0DTE trading has changed PCR dynamics
- Single-stock skew: Large put/call activity in one stock can skew the equity PCR
- Timing challenges: Extreme readings can persist before reversals occur
Important note: Never trade PCR extremes blindly. Wait for price confirmation and use proper risk management. Markets can stay extreme longer than you can stay solvent.
Where to Find Put/Call Ratio Data
Several sources provide daily PCR data:
- CBOE website (official source)
- Yahoo Finance Options Statistics
- Barchart.com
- TradingView (indicator available)
- Most broker platforms with options data
Track Your Options Trades with Analytics
Pro Trader Dashboard helps you monitor your options trading performance alongside market sentiment indicators. See your win rates, average returns, and how your trades correlate with sentiment extremes.
Summary
The put/call ratio is a valuable sentiment indicator that reveals the positioning of options traders. As a contrarian tool, extreme readings often signal that a reversal may be approaching. Use the equity PCR for the cleanest signal, apply moving averages to smooth the data, and always combine with other analysis before acting on signals. Remember that timing extreme sentiment is an art, not a science.
Want to learn more about sentiment indicators? Check out our VIX trading guide or explore the Fear and Greed Index.