Investments, tenth edition

12.4 

  Put/Call Ratio   

Call options give investors the right to buy a stock at a fixed “exercise” 

price and therefore are a way of betting on stock price increases. Put options give the right 

to sell a stock at a fixed price and therefore are a way of betting on stock price decreases.  

26

   

The ratio of outstanding put options to outstanding call options is called the    put/call  ratio   . 

Typically, the put/call ratio hovers around 65%. Because put options do well in falling 

markets while call options do well in rising markets, deviations of the ratio from historical 

norms are considered to be a signal of market sentiment and therefore predictive of market 

movements.  

 Interestingly, however, a change in the ratio can be given a bullish or a bearish inter-

pretation. Many technicians see an increase in the ratio as bearish, as it indicates growing 

interest in put options as a hedge against market declines. Thus, a rising ratio is taken as 

a sign of broad investor pessimism and a coming market decline. Contrarian investors, 

however, believe that a good time to buy is when the rest of the market is bearish because 

stock prices are then unduly depressed. Therefore, they would take an increase in the put/

call ratio as a signal of a buy opportunity.