Sunday, November 22, 2009

Intraday Put/Call Ratios as Short-Term Sentiment Measures

If you take a look at my recent post on the CBOE equity put/call ratio, you'll get a sense for what an average ratio has looked like lately.

Those ratios, however, can also be informative on an intraday basis.

Here we see Friday's trade in the S&P 500 Index (SPY; blue line) plotted against the CBOE equity put/call ratio for each 30-minute period of the day. Note how a very high level of bearishness accompanied the early market action, as we held above the overnight market high and then rebounded in the afternoon. Note also how the ratio turned bullish as we leveled off late in the trading day.

While there isn't a one-to-one correspondence between tops and bottoms in the put/call ratio and bottoms and tops in stocks, the ratio does do a nice job of telling us when the bull or bear sides are becoming crowded. Those are occasions where we're most likely to see short-term reversals.


Lasertrader said...

Dr Steenbarger

Since the Equity Put?Call is only reported every 30 minutes I think it maybe be the other way around. I think the movement in the SPY will indicate what the next Equity Put/Call will be since we are already seeing the action in the index before the next update. Im not sure I understand how this can be used.

D TradeIdeas said...

Excellent post. I'd like to read more of your thoughts on this: The Put/Call ratios a trader can filter within Trade Ideas can also look for numbers far beyond the pale as a precursor to big news. Such was the case of large Put/Call ratios we discovered in advance of the Bear Stearns collapse in March of last year.