Put/call ratio

The put/call ratio is a sentiment indicator that compares the trading volume of put options to the trading volume of call options over a given period, used to gauge whether investors are leaning bearish or bullish as a group. Since puts are typically bought to profit from or protect against a decline and calls are typically bought to profit from a rise, the balance between the two offers a rough snapshot of the market's mood.

The ratio is calculated by dividing put volume by call volume, either for an individual stock or across an entire options market such as all contracts traded on a major exchange. A reading above 1.0 means more puts traded than calls, generally read as a bearish or defensive signal, while a reading below 1.0 means more calls traded than puts, generally read as a bullish signal. Extreme readings in either direction are often watched more closely than the absolute level itself.

The formula is:

Many traders use the put/call ratio as a contrarian indicator rather than taking it at face value. An unusually high ratio can signal that pessimism has become extreme, which sometimes precedes a market bottom as selling pressure exhausts itself, while an unusually low ratio can signal excessive optimism that sometimes precedes a pullback. As with any single sentiment gauge, it is generally used alongside other measures of market positioning rather than as a standalone trading signal, since extreme readings can persist for extended periods before any reversal actually occurs.