Put/Call Ratio is used as sentiment indicator, trader use it to gauge the strength or weakness of the market.
Data of Put/call Ratio are collected by the CBOE (Chicago board exchange), and is available at their website http://www.cboe.com.
There is two Put/Call Ratios, one for equities and one for indexes, it is computed by dividing the total put-options volume by the total call-options volume in the CBOE.
This ratio is widely used by investors that try to predict bull top and bear bottom, since a long time this ratio had a great success but in these days false signal are becoming more and more frequent.
Does it mean that this sentiment indicator is dead?
Because, too many investors use it, and you probably know that going with the crowd is a bad investing idea, this indicator may lost of its efficiency.
My personal point of view is that as soon as more and more investors will abandon this ratio, then it will be the moment to use it again.
Day-to-day volatility can be very erratic so using raw indicator is advice against.
Rather you should use moving average of Put/Call Ratio; 21 day moving average is widely used as 21 day is about one month in trading.
Try to download this ratio data on your favorite technical analysis software and make some back-test to convince yourself that this ratio is out of date.
And why not, maybe you can find something interesting that make my point of view faulty.
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