The put-call ratio is used to measure market sentiment. It measures the amount of put options traded against the number of call options traded in a given period. A high put call ratio indicates a bearish sentiment in the market, while a low put call ratio indicates a bullish sentiment.

Put-call ratio calculation

To calculate the put-call ratio, divide the total number of puts traded by the total number of calls traded.

For example, if 1,000 puts and 10,000 calls were traded during a specific period, the put-call ratio would be 0.1 (1,000/10,000).

How to trade using the put/call ratio

Put call ratios are often used to determine whether an investor should enter a long or short position in a particular stock or index. 

When the ratio is high, it may be a market indicator of bearishness. Mean reversion traders may enter into long positions, while momentum traders may enter short positions.

Conversely, a low put-call ratio means more calls are traded, which could signal a bullish sentiment.

Put call ratio chart

The put-call ratio chart represents the ratio between put and call options traded on a given day, week, month, or any timeframe. Put call ratio charts can be used to determine whether investors are bearish or bullish in their outlook for a particular stock, index, or sector.

A higher-than-normal ratio indicates that more puts were bought relative to calls, which suggests that investors are bearish on the underlying asset. A reading above 0.7 is typically considered bearish.

The chart can also show other important information, such as volume and open interest. Volume refers to the total number of contracts traded in a single day. Open interest is the total number of contracts outstanding at any given time.

By studying the put-call ratio chart, traders can gain insight into how investors feel about a particular stock or index. A high ratio may indicate that investors are bearish, while a low ratio may mean that they are bullish.