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.
![Calculating put-call ratio formula](https://cdn.prod.website-files.com/5fba23eb8789c3c7fcfb5f31/6446d6c2fbeaaa82332ac03e_Put-Call-Ratio-Formula.jpg)
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.Â
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.
![Chart of the Put-Call ratio](https://cdn.prod.website-files.com/5fba23eb8789c3c7fcfb5f31/6446d73c9f884c9e06148905_Put-Call-Ratio-Chart.jpg)
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.