If you hang around trading communities for a while you may hear people talking about the put-to-call ratio. But what is it? And why should you as a retail forex trader care?
What is the put to call ratio?
If you’re familiar with options trading, then this would be a simple answer, but for those trading fx or indices via CFDs well maybe not so.
SImply put, it’s the ratio that compares put options with call options.
A put option is a financial instrument that gives the holder the right to sell an asset at a specified price, by a specified date. This is seen as a negative bet on an asset.
A call option is the opposite and is the right to buy an asset at a specified price, by a specified date. This is seen as a positive bet on an asset.
All in all, the put-to-call ratio is a measure of puts vs calls in the market.
How to read it as an fx or indices trader
If the put-to-call ratio is less than 1 it means there are more calls than puts and that often leads to a more bullish market.
If the put-to-call ratio is greater than 1 it means that there are more puts than calls and often that can lead to a more bearish market.
However, if we look at the data I prefer to use it when it reaches extremes. Let’s look at the example above, on the 9th April the ratio reached 1.06 this would normally be seen as a bearish indication, but look what happened to the price, it bottomed out and reversed.
What is it saying now?
Currently the ratio sits at 0.86 and that means the market is more bullish than it is bearish at the moment. This is shown in the stock markets as they are all near enough breaching into all time highs.
Does this mean it’s going to continue? Not necessarily, but it gives us a good view of what the market mindset is at the moment.