Hello,
Can some of the experienced traders on this board explain how they use the put/call ratio to make decisions?

Thanks,
Eric

Hello erac22

The put/call ratio ..is the ratio of put option volume vs. call option volume.From a traders perspective...it is often used as a contrarian indicator as it implies extreme bearishnes in the stock market.FWIW....I find it to be very reliable as a short-term trading tool

GL,
Stephen

I've seen differing opinions as to what is nuetral/bearish/bullish. At what reading do you consider it a buy/sell signal?

When the put/call ratio is substantially higher, above 0.60, this suggests the majority of investors are bearish, while contrarian technicians believe the investment environment is bullish. In contrast, if the put/call ratio falls to or below 0.40, the majority of investors typically considered bearish, which contrarians interpret as the exact opposite; that is, as a bullish signal. Any reading between 0.60 and 0.40 is considered more as investors’ unwillingness to short stocks or buy puts than as definitive contrarian signals.

The above is considered the "standard" by contrarian traders/investors

i think you've misspoken here. if the put/call ratio <1, market is "bullish" (or rather calls are more popular than puts).

if it is >1 then the market is "bearish".

i think you meant put/total option volume ratio but its all good.

Barron

oooops.....I did mean P/total volume ...thanks Barron

so, for instance, today there were strong buy signals on QQQ from 9:30 till 11ish, after which the indicator goes fairly neutral?

http://www.cboe.com/Data/IntraDayVol.aspx

thanks,
e

To be honest I only use the put/call ratio as a contrarian indicator for longer periods of time.Using this intra-day will create alot of noise and false/failed signals

When these reading are at EXTREMES over longer time frames(such as weeks/months)...they can be very reliable.We had at LEAST two major buy signals this year alone and they both coincided with market bottoms.Even though these might not be long term/absolute market bottoms....they definately make for tradeable reversals which you can then capitalize on IMO

GL,
Stephen

Thanks for the input, but just to make sure I'm reading the data correctly, p/c > 1.2 is bullish, p/c < .8 is bearish, the more extreme the more reliable the reading, right?

thanks

Without a doubt the longer time periods/greater the extremes......the more reliable the signal will be.They are also much more reliable in oversold/bearish markets IMO.However in a bull market run being a contrarian trader.....pinpoint decision making and very tight stop losses in place are imperative

I have seen plenty of SHORTS get wiped out/squeeezed to death trying to step in front of that train.

GL

Which do you find more powerful, the VIX or the put/call ratio? I have been exclusively using the VIX vs. moving averages this year and if the put/call ratio is as or more powerful, I would like to develop a strategy using that.

The VIX and its not close imo.

Lets put it this way.....when the VIX index(which is probably THE MOST powerful contrarian indicator of all of them) spiked above 30+ this year on two separate occasions ,we had huge reversals/rallys.Even though these signals might be only short term and last for only a few days/weeks.......the potential profitable trades that can arise from these oppurtunities are tremendous

GL,
Stephen

For the newbie in stocks. Can someone explain what the VIX is??

a) i trade options all day and no one cares about this ratio. it just tells you people are buying more puts than calls, and usually the reasons for this is obvious. It doesnt mean the stk will go down more... For example, without looking at the option volume you can be pretty sure than in front month options there are more puts traded on Washington Mutual than calls.

b) the VIX is essentially the 1/s&p and so your statement is basically the equivalent of saying "the S&P went below 1260 twice and that was a tremendous buying opportunity". While it turned out to be a good time to buy, im not really sure what 30 in the vix tells you.... Or what 1260 told you.... It turns out that bear was a good buy at 2 also.

Good explanation as to how it is calculated:

http://en.wikipedia.org/wiki/VIX

Generally as it gets higher (fear rises), it is bullish for stocks and it declines (less fear), it is bearish for stocks. Here is a quick article:

http://www.minyanville.com/articles/...285/from/yahoo

I find it useful to track it vs. a moving average. Depending on your time frame should be how your baseline.

I use a 10 day moving average and the market seems to want to reverse at +/- 8%. I will be adding more shorts at the open if the market goes up as futures suggest.

jason,

i'm pretty sure this doesn't hold logically. being long the vix is being long vol. over time you bleed a bit being net long.

being net long S&P500 earns you more than being net short the vix loses you.

therefore, it isn't 1/S&P500 (and i think you mean -1*S&P500). i mean what you really mean to say is that the pearson correlation coefficient of the S&P500, VIX pair is basically -1. but that clearly does not mean that they move in the same SIZE. correlation only takes into acct directional similarity not the size of the moves.

what stephen was saying, i think, was that large jumps in risk aversion have typically been good buying opportunities. for stocks, this has historically been accurate. large jumps in risk aversion are equivalent to large increases in risk premia. those times have historically been the best time to load up on risky assets.

of course, this is a contrived backward looking 20/20 hindsight example. but i think it gets the point accross.

Barron

This is entirely inaccurate, the VIX measures how rich out of the money options are priced (both calls and puts). You mention Bear, I don't understand how this fits in, the VIX in trading theory has zero to do with individual stocks, but the market as a whole.

jason was saying the example was backward looking and gave an analogous backward looking example (bear at $2 being a good buy).

Barron

i said essentially. obviously it is not exactly the same as the inverse of the s&p, but it is very close. the correlation co-efficient is around 90. making a market call based on the spot price of the vix is very much the same thing as making a call based on where the S&p is trading.

I pointed out bear because i was just giving an example of trading when you know the future.

Jason

Since your WS carreer is STILL less than 1 yr old...........you now say no one cares about this index/reading?To even say you trade options and not understand its importance is quite comical to me.It amazes me that a smart kid can come on this board every few weeks and make a comeplete moronic statement such as this.If I believe correctly .......you had a similar idiotic reply when I informed the the board in Jan.about shorting GOOG,AAPL and RIMM and my reasons.Your reply was "why dont you just short the BIDU train also".Unfortunately I should have used "YOU" as the contrarian indicator as you seem to excel at being an inverse buy/sell signal

Well you made a jackass of yourself back then....and proceeded to slither back into the night .Now you return with one of the dumbest things I have ever heard from a supposed 'options trader'...LOL?

1.First of all I have been talking about using the VIX as a contrarian sentiment indicator with regards to the general overbought/oversold condition of the stock market.Not on individual stocks

2.WTF does my use of the VIX as a sentiment indicator have to do with Bear Stearns or Wamu calls or puts?

Jason....You really have NO clue what you are talking about sometimes and seem to just parrot back some BS crap that you heard that day from your new day job.Please dont embarrass yourself here.This isnt HSNL where your poker fanboys will come running to the rescue

GL,
Stephen Feraca

I think the VIX is a little overrated but it is a nice "red siren" for intermediate term moves when extreme readings are shown.

Wow, so price is probably a better guide than an indicator for future performance what a revelation.

I trade the VIX from time to time. Last year it was my main trade for a while and even though the strategy I was using was very profitable it was too time consuming for me and kept me away from what I felt were even better opportunities. It is very much a lagging indicator. When the VIX is spiking things are generally pretty horrific and visa versa. That said it is indeed a very good contrarian indicator as the spikes indicate the blowoff/washout scenario. It is also maybe the most volatile contract imagineable on a percentage move basis.

Hello mrbaseball

As I have implied many times before....the VIX index is a very reliable market sentiment indicator from a contrarian POV.During severe market sell-offs....... huge spikes in the VIX generally indicate fear/panic and an overall extremely oversold condition.These situations usually represent some great short-term trading oppurtunities at the very least.Whether that also coincides with a longer-term market bottom will also require many other factors(e.g. fundamentals) to confirm a new bull market

GL,
Stephen