# Put/Call Ratio

#### John Carter

Apr 05th 2022  .  6 min read

One of the most important things a trader can do is to figure out what kind of market they are trading in. And, whether it’s a bull or bear market. Understanding what kind of market you are attempting to trade in will not only give you an advantage but will help you identify what strategy you need to apply to the market.

For instance, if a trader is looking to short the S&P 500, and the market has a bullish sentiment, it could prove to be a disastrous trade for the trader. So how can a trader gauge market sentiment? By the put/call ratio. So, let’s get right into it and go through why this is such a great indicator to use for your trades.

## What Is the Put/Call Ratio?

The put/call ratio is the ratio of the volume in trading between the put options trading and the call options trading. Traders and investors use the put/call ratio to measure the market and to gain a better understanding of its sentiment.

For example, it pinpoints the ratio of put and call options and tells the trader if traders are buying more call options, as it might indicate a bullish trend. And vice versa, if traders are buying more put calls, then it may indicate a bearish trend. It’s important to note the demand for calls and puts, the indicator only gives you a ratio to work off of, and additional research is encouraged.

## Put/Call Ratio Rule

The put/call ratio is a little unreliable during the first five to ten minutes of the trading day. The put and call ratio has a staggered open on options. However, aside from that, a balanced put/call ratio will always equal 1. It means that there is an equal number of buyers of calls and puts. Below we have formed a good breakdown of what each ratio means, so that way you can apply it to how you read the indicator and trade accordingly.

### Put/Call Ratio Basics

• The put/call ratio is below .45 means it is severely negative
• The put/call ratio is between .45 and .65 means it is negative, but not extremely negative
• The put/call ratio is between .65 and .75 means it is slightly negative
• The put/call ratio is between .70 and .85 and is considered neutral. The put/call ratio between .70 and .85 means the market action and the prices of the Dow and S&P can go up or down equally as easy
• The put/call ratio is between .85 and .95 is bullish, but moderate
• The put/call ratio is above 1.0 means it is extremely bullish. If the put/call ratio goes above 1.0, I look to go long

## Put/Call Ratio Rule of Thumb

If price action is going up, you’d like to see the put/call ratio going up. If the price action is going down, you’d like to see the put and call going down.

The main way I use the put and call ratio is to make sure there is nothing out of whack in the trading market. The ratio is like a tourniquet. If you are bleeding and you apply it correctly, you will survive. If the put/call ratio gets above 1.0 when the market is selling off, it will hold. If the put/call ratio is not, it will just slow down the bleeding.

However, the put and call ratio is a tool, it’s not the end-all be-all indicator that traders and investors should rely on. It’s a good proficient way to figure out the bullish and bearish sentiment that traders tend to seek. However, You still must do a lot of research analytically and technically to be able to make a sound decision. And even then, sometimes that is not enough. But that’s life as a trader.