Info!! Relative Equity Put/Call Ratio: What Nosotros Tin Larn From Stock Marketplace Sentiment

One of the psychological curiosities of the stock marketplace is that nosotros tend to come across euphoria when shares are their near overvalued in addition to despondency when they are trading at greatest value.  It's for that argue that persuasion gauges tin last useful inwards tracking marketplace cycles.  One of my favorite measures is the ratio of set options traded to telephone phone options traded for every stock amongst listed options across all options exchanges.  Note that this is an equity put/call ratio only; it does non include index options.  The latter, I've found, are to a greater extent than often used every bit hedging vehicles in addition to so are non every bit reliable every bit persuasion gauges.  (Data available via e-Signal; ratios derived from CBOE listed options are available from Index Indicators). 

Going dorsum to 2010, let's limited each day's persuasion every bit the ratio of the electrical current day's equity put/call ratio to the average ratio of the prior xl days.  When this relative put/call ratio has been inwards its lowest quartile (current put/call ratio depression relative to prior xl days), the adjacent 5 days inwards SPY accept averaged a attain of exclusively .04%.  When the relative put/call ratio has been inwards its highest quartile (current put/call ratio high relative to prior xl days), the adjacent 5 days inwards SPY accept averaged a attain of .62%.   Overall, from 2010 to the present, the average five-day attain has been .29%.  

Being a buyer when others accept been especially bearish has been a winning strategy inwards recent years.  We saw this near latterly when put/call ratios became elevated several days agone next the marketplace drop, leading to the rally of the by 2 trading sessions.  Interestingly, yesterday's put/call ratio dropped to below average next highest quartile readings on July 31, August 1, in addition to August 5.  Such rapid shifts inwards persuasion accept helped brand stocks noisy to merchandise on a longer-term basis.  More on this topic inwards an upcoming post.

Further Reading:  Stock Market Social Sentiment
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