What is the Put-Call Ratio (PCR)?
A mathematical sentiment indicator that compares put volume to call volume—revealing whether traders are betting on fear or greed.
Quick Summary
The Put-Call Ratio (PCR) = Put Volume ÷ Call Volume. A PCR above 1.0 signals bearish sentiment (more puts), below 0.7 signals bullish sentiment (more calls). Contrarian traders use extreme readings as reversal signals—when everyone is fearful, markets often bottom; when everyone is greedy, markets often top.
In the stock market, the majority is often wrong—especially at the extremes.
When everyone is euphoric and buying, the market is usually near a top. When everyone is terrified and selling, the market is usually near a bottom.
But how do you measure "fear" and "greed" scientifically? You can't just rely on news headlines. You need hard data. One of the most reliable data points for measuring market sentiment is the Put-Call Ratio.
The Definition: What is the Put-Call Ratio?
The Put-Call Ratio is a mathematical indicator that compares the trading volume of Put options to Call options.
It answers the simple question: "Are traders betting more on the market going up (Calls) or down (Puts) today?"
THE FORMULA
- PCR = 1.0: Volume is perfectly balanced. For every 100 calls bought, 100 puts were bought.
- PCR > 1.0: Puts are more popular. (Bearish Sentiment)
- PCR < 1.0: Calls are more popular. (Bullish Sentiment)
How to Read the Ratio
The Put-Call Ratio is usually tracked on the broad market (like the CBOE Equity Put/Call Ratio) rather than just single stocks. Here's how to interpret the numbers:
PCR Sentiment Spectrum
- PCR < 0.7 — Greed. Traders buying more calls. Mood is optimistic.
- PCR = 0.7–1.0 — Neutral zone. Normal market activity.
- PCR > 1.0 — Fear. Traders buying more puts. Mood is protective.
- Extreme High PCR (1.2+) — Everyone already sold. Potential bottom.
- Extreme Low PCR (0.5) — Everyone already bought. Potential top.
- The crowd is right in the middle, wrong at extremes.
The Contrarian Edge: Betting Against the Crowd
Professional traders don't just follow the crowd—they often bet against it. They use the Put-Call Ratio as a contrarian indicator.
Contrarian Bullish Signal
Everyone is betting on a crash. But when everyone has already sold, there's nobody left to sell. Often signals an oversold bottom.
Contrarian Bearish Signal
Everyone is piling into bullish bets. The market is frothy and complacent. Often signals an overbought top.
The crowd is usually right in the middle of a trend, but usually wrong at the turning points. Use the PCR to spot those turning points.
The Nuance: Equity PCR vs Index PCR
Not all Put-Call Ratios are created equal. It's important to know which data set you're looking at.
| Metric | Equity-Only PCR | Index PCR (SPX, NDX) |
|---|---|---|
| Measures | Options on individual stocks (AAPL, TSLA, etc.) | Options on market indices |
| Typical Range | 0.6 – 0.7 (lower) | Often > 1.0 (higher) |
| Main Users | Retail traders (love buying calls) | Institutions (use puts to hedge portfolios) |
| Best For | Measuring speculative "greed" | Measuring institutional "fear" and hedging demand |
Warning: The Dividend Distortion
When a major ETF or stock is about to pay a dividend, arbitrage traders often execute massive options strategies (like dividend capture plays) that involve buying thousands of puts and calls simultaneously. This can cause volume to spike artificially, skewing the PCR for a day or two. Always verify that a spike reflects genuine market sentiment, not just arbitrage activity.
Frequently Asked Questions
Summary: The Market's Thermometer
The Put-Call Ratio is the thermometer of the market.
How the PCR Thermometer Works
Everyone buying calls. Expect a cooldown.
Everyone buying puts. Expect a warmup.
By watching this ratio, you can stop trading based on your own emotions and start observing the collective emotions of the market—potentially positioning against them when they reach extremes.
