Stocks & Commodities V. 22:4 (52-55): Dollar-Weighted Put/Call Ratios by Fari Hamzei and Barbara Star Ph.D.
Does this new twist on the popular sentiment indicator hold some predictive value? Find out here.
Many years have passed since Martin
Zweig used end-of-day option trading activity to create the put/call ratio. Since then, it has been widely followed as a measure of market sentiment. It reflects the emotional aspect of trading by identifying the degree to which traders feel optimistic or pessimistic about near-term market direction. Because it reveals what traders are thinking, many believe that the put/call ratio holds some predictive value.
The original put/call ratio is based on total option contract volume for the day. It aggregates all put and call option volumes into one ratio. But options traders know that prices fluctuate throughout the day, and thus,
not all contracts for a given stock or index are created equal. Wouldn’t it make more sense to track changes in option trading on a real-time basis and incorporate both price and volume in the calculation? That was the
premise Fari Hamzei wanted to test. He managed to create the code and gather the information needed to produce real-time, dollar-weighted put/call ratios, thanks to improved computer technology and Internet speed.