A Put/Call Ratio Oscillator To Pinpoint Market Conditions
by John Summa
Who says the put/call ratio doesn't work anymore? Here's an oscillator that's great for pinpointing intermediate market tops and bottoms.
What's the ideal time to write an
option? The ideal time to write
a deep out-of-the-money
(DOTM) put or call options
credit spread? While charts
may tell you when to exit such
a position, the correct use of
put/call ratios offer an excellent
way of determining just when to
enter your trade. Here's one approach to interpreting equity-only put/call ratios, combined with my own volume-weighted,
put/call ratio oscillator for finding just when to write your
DOTM spreads for maximum probability of success.
During any intermediate bull or bear trend, investor moods
tend to remain slanted in one direction or the other - hopeful
or worried, driven by greed on one hand and fear on the other.
When either sentiment becomes too prevalent, contrarian
analysis suggests that the trend is ready for a change. This is
based on the view long held by technicians that the majority
of the investing public is usually wrong just when everything
seems right. Historical data confirms that it is indeed possible
to construct parameters that indicate when the crowd has
gone too far toward one extreme or the other,where condi-
tions are thus ripe for a reversal.
Market professionals and insiders, therefore, often attempt
to trade crowd psychology in the opposite direction, often
referred to as contrarian technical analysis. Indeed, put/call
ratios have been, and remain, very effective contrarian sen-
timent tools, particularly since the public's speculative use of
options has exploded with the online investing revolution.