A leading indicator of the sentiments is the
call-put ratio. This indicator is calculated by dividing the
volume of call options by the volume of put options.
A call option gives the holder a right to buy.
If the number of call options are more than the number of put
options, it indicates that more people are interested to own the
stock. In other words, a call-put ratio of more than one indicates
a bullish sentiment. The higher the ratio, more is the
bullishness. A call-put ratio below 1 indicates a bearish
sentiment. A call-put ratio of one indicates a neutral view
prevalent in the market.
While the call-put ratio indicates sentiment, a
look at the trend over a period of time can also be a good
indicator. Even though the call–put ratios are greater than one
over a period of time, it may not really indicate bullishness if
it is falling over a period of time. Conversely, call-put ratios
even if it is always less than one need not indicate bearishness
if it is a rising trend. Other words call/put ratio is a market
sentiment indicator not a trend confirmation indicator.
