Put/Call Volume Ratios – Useful or Not?

The biggest drawback to put/call ratios is the fact that you cannot tell if the options involved were bought or sold to open. Since call buyers and call sellers (writers) have entirely different expectations for the underlying shares, this distinction can be very important in accurately assessing investor sentiment.

As a way to combat this shortcoming of put/call ratios, buy-to-open (BTO) put/call volume ratios are gaining popularity as tools in analyzing options-related investor sentiment. Along these lines, Schaeffer’s Investment Research analyzes data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE), the two largest options exchanges in the world, to compare BTO put volume with BTO call volume in order to gain a better grasp of investor expectations and intentions.

At the most basic level, a rising BTO put/call volume ratio indicates a clear preference for long puts over calls, while a rising put/call ratio could just as easily be influenced by a jump in put selling as put buying. For short- and intermediate-term trading, 10-day BTO put/call volume ratios from the ISE/CBOE data can help identify stocks that have attracted a wealth of call or put buying, a determination that carries considerably more weight from a sentiment perspective than simple open interest levels.

In conclusion, put/call ratios offer valuable sentiment insight. Combining this form of sentiment analysis with your regular stock or options selection routine could give you a considerable edge. Finally, by uncovering how the rest of the market views a particular security, you can more accurately adjust your trading strategy to the current environment.