PCE trade ideas
The Put/Call Ratio in a NutshellWhat is the put/call ratio?
The put/call ratio (PCE) is a popular barometer of market sentiment, which shows the ratio of trading volumes of Put vs Call options. However, with distortions in the current price of nearly every instrument off the back of "free money," and persistent market intervention by policy makers, we're not quite seeing the price discovery we're used to, which has made it more difficult to make sense of the Put-Call, and other technical indicators as well.
What is a derivative?
To understand the value of the put/call ratio, we must first understand the derivatives market. A derivative is a (leveraged) instrument, which gives the holder a right to either buy (call) or sell (put) a specific amount of a stock (or other instrument), at a specified price, and timeframe. If your'e holding a put, you're likely expecting the price of the stock to fall, while holders of calls are expecting the price to rise. Puts are usually used as a solid hedging tool, while calls are more often related to speculative behaviour.
How to use the put-call ratio?
When the put/call rises above 1, it indicates that market sentient is shifting more bearish. At the moment, we're looking at a put/call of around 0.46, which indicates that market sentiment is very bullish, and actually, it's been bullish for quite some time as you can see in the chart. When we see a massive shift in the put/call back above 1, naturally it would be showing that investors and traders are becoming more defensive.
Put to Call Ratio Signals SentimentThe put to call ratio is simply the ratio of short options over long options in the S&P 500. What sticks out to me is that the ratio saw its second highest level in December of 2018. While a bottom of .3 percent would likely signal irrational exuberance as had been suffered in 2007, it seems since 2012 a bottom target is .6 percent. While the market melts up under low volume, this could be an interesting chart to keep an eye on as a signal before a major correction.
