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Put/Call Ratio On Target

09/12/03 09:34:11 AM
by Koos van der Merwe

The put/call ratio is simply the number of put options contracts traded in a given day divided by the number of call options contracts traded that same day. The put volume divided by the call volume yields the put/call ratio.

Security:   PRATIO
Position:   Buy

The chart below shows an inverted put/call ratio and the S&P 500 chart.

I have charted the put/call ratio in a thin black line and placed a thicker 2-period simple moving average (SMA) over it in red. Using an SMA will remove some of the volatility from the ratio and in this way give you a better signal.

The top chart is of an inverted put/call ratio and the bottom chart shows the S&P 500 Index.
Graphic provided by: AdvancedGET.
The chart signals a buy mode when the moving average of the ratio is below the bottom horizontal band, and a sell when it is above the upper horizontal band. Both bands are chosen by eyeballing the chart and determining the best fit.

Note how the ratio gave a buy signal at 'A' whereas the moving average of the ratio (red line) only gave the buy signal at 'B'. The ratio has been pretty accurate over the timespan shown and could be moving into a buy mode in the next few days.

Koos van der Merwe

Has been a technical analyst since 1969, and has worked as a futures and options trader with First Financial Futures in Johannesburg, South Africa.

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Vancouver, BC
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Date: 09/23/03Rank: 5Comment: 
Date: 01/24/04Rank: 5Comment: Where can I get the chart for put/call ratio inverted like that?

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