Bras-Trading

Archive for the ‘market indicator’ Category

Traders like simple indicators using market-tested data, and preferably those that provide a snapshot with the market’s underlying psychological mood at any time in time. An indicator similar to this supplies a good basis on what to trade, either with or against the prevailing market climate.

The put-call ratio is a good example on this, most famously because options are popular by market professionals also, since they’re traded in standard-sized lots by way of a central market.

The indicator shows the volume of put option contracts traded in a very particular market index divided with the amount of call option contracts traded. It will generally looked into on a regular basis, or possibly from a big market movement has brought place. The daily results can be translated into chart form to supply some perspective. Put and call option volume in market indices, or perhaps the data from which to calculate them, are published on the internet and in a few areas of the financial press.

So, what could be easier? But interpreting put-call ratios is not less than a skill. One reason is the fact that choices used both for speculation and hedging. So the volume data on index puts, for example, include those who are betting the marketplace will fall, and those who think it will or might not drop, but want some insurance in case.

And so the obvious point that the further the ratio, the more bearish sentiment is starting to become, while correct, doesn’t invariably tell the complete story. Another point would be that the put-call ratio often differs widely for individual equity options as well as index options.

As outlined by recent CBOE data to the US market, for example, the put-call ratio for S&P index options was 1.9 (roughly twice as many puts as calls traded), however for equity options the figure was 0.52 (roughly two times as many calls as puts traded). Latest data for FTSE100 index choices on NYSE-Euronext show much the same picture. The index put-call ratio is 2.15, while equity option data show a put-call ratio of 0.57.

Most traders, however, probably confine their interest towards the index option put-call ratio beeing the best help guide to overall market sentiment – which really the object with the exercise.

Another big reason behind taking care when interpreting the put-call ratio is with the margin it really is frequently a contrary indicator. Extremes in put-call activity, like a sharp upward or downward spike inside the index, indicate on one side an environment of fear within the currency markets or, on the other hand, excessive optimism. In the two cases it could be to trade against them.

When does normal bearishness or bullishness become panic selling, and change from your like a straightforward guide to sentiment into a sign that astute traders ought to do the other on the crowd? There is absolutely no real means of knowing besides experience and instinct, although other indicators of market sentiment might also confirm a location of out-and-out greed or blind fear.

Long term charts with the put-call ratio show regular, and quite sharp, swings once the data is plotted over many years. A better guide for traders is perhaps the buzz over a few months. Some traders also plot the chart with the index of implied option volatility (the VIX) about the same chart since the put-call ratio. The information is, obviously, related plus a method complementary. The VIX measures volatility as implied by option prices, the put-call ratio trading volume. But trends a single index often confirm movements inside the other. Both need interpreting with pride.