| Why This Metric Matters | The Chicago Board Options Exchange (CBOE) equity put  /call ratio indicates the sentiment of options traders. Put buyers are betting that stocks will fall, while call buyers are betting that stocks will rise. When the number of puts relative to calls is high, that means investors are bearish. When the number of calls is higher, that means investors are more bullish. The put/call ratio, however, is often used by the investment community as a contrary sentiment indicator. That is, the higher the ratio, the more bullish it's considered to be, on the theory that investors are too bearish. The lower the ratio, the more bearish, on the theory that investors are too bullish. Generally speaking, a put/call ratio of 0.75 or higher is considered bullish. A reading of 0.40 or below is considered bearish. Anything in between is considered neutral. | |
| Historical Info | | On Friday, April 14, 2000, the day when the Dow fell 617 and the Nasdaq dropped 355 -- their worst plunges ever -- the equity put/call ratio hit 0.77. That high put/call ratio marked a short-term bottom in stock prices, as the Nasdaq and Dow rebounded sharply, registering huge gains the following Monday and for the next week. | | | |
Dan Bernstein
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