A call is the right to buy the underlying security. A put contract gives the holder the right to sell a specified amount of the underlying security at a specified price and by a specified date. The P/C ratio-an indicator that measures total put options volume relative to call options volume-is one such tool, and you don’t have to be an option trader to potentially benefit from its insights. Objective information is needed to gauge whether sentiment is bullish or bearish. Unfortunately, the art of contrarian thinking isn’t easy. On the other hand, when pessimism, negativity, and bearishness dominate investor sentiment, perhaps it’s time to consider bottom-fishing or increasing your equity exposure. Right? Contrarians-those who typically buy or sell against prevailing trends, the bears in this case-would say that when everyone’s already buying equities, who’s left to buy? At that point, it might make sense to adjust your own long portfolio strategy by hedging your positions, reducing equity exposure, or moving to the sidelines, as the probability increases that a market reversal might be near. When everyone seems upbeat, optimistic, and bullish, they can’t all possibly be right. Those readings typically don’t last long, but when they do happen, price reversals can occur (see figure 1). Investor sentiment tends to matter more when certain indicators are hitting extremes. It’s an indicator that measures the amount of put activity relative to call activity in the options market. One way to gauge short-term investor sentiment in the stock market is the put/call (P/C) ratio. To follow or bet against the crowd? Some say it depends on how you’re reading it. Learn how to monitor the P/C ratio for all stocks with listed options, as well as the ratio for each individual stock, on the thinkorswim ® platform.Understand the put/call (P/C) ratio and how it can help traders and investors gauge market sentiment.
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