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In the previous articles, we have already seen that the sponsorship of sports teams can happen at multiple levels. We have also seen how the sponsoring of individual athletes works and how it provides benefits to the sponsor as well as the athlete. It is important to note that sponsorship can happen at levels which […]
High Yield Bonds
The international bond market is a large and diverse market. There are various categories of bonds that are issued in these markets globally. However, they can be categorized based on their risk-return profile. The safest bonds are issued by sovereign entities. They are considered to be the safest since governments have the power to tax […]
The Importance of Personal Finance
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Multi-Banking: Meaning and Characteristics
The commercial banking industry is undergoing a rapid transformation. This transformation has been enabled by the increasing use of digital technologies in the commercial banking industry. Open banking has become a game changer when it comes to the field of commercial banking. It has enabled the use of many other modern banking solutions. Multi-banking is […]
Interbank Lending Markets and Repurchase Agreements
Banks have to lend money in accordance with the amount of reserves that they have on hand. However, there is no way of finding out the exact amount of loans that a bank can give out while still complying with the reserve requirements because taking deposits and making loans happen simultaneously. Therefore, it is impossible […]
The put call ratio is the only financial ratio that does not compare the current market price to any financial statement item. Rather it compares what investors plan to do with a given stock or an index at a later date. Put and call are derivative options. The put option gives the seller a right but not an obligation to sell, however the call option gives the buyer a right but not the obligation to buy. Analyzing the put call ratio can give the investors some insight about where the stock is headed for in the near future. This ratio is more relevant to short term price movements rather than long term ones and is hence more widely used by speculators who are looking to make a quick buck.
Put Call Ratio = Number of Put Options / Number of Call Options
This data is periodically published by the exchange. Hence investors can easily have a look at these numbers.
A high put call ratio signals a bearish trend in the future and indicates that short selling must be done to profit from this change. On the other hand, a low put call ratio indicates a bullish trend which speculators perceive as a signal to go long.
Many speculators believe that the put call ratio does not represent the true picture. This is why there are a few variations of the put call ratio that are used. Before making a call based on any put call ratio, investors must understand what variation is being used and therefore how to interpret it. Common variations are as follows:
Moving Average: Instead of using the put call data for a single day, speculators usually use data for an extended period of time. Usually the moving average used is that of 21 days. However, the number of days can be different.
Money Weighted: Some speculators feel that money weighted put call ratio is a better indicator since it informs about the possible number of options that will be exercised.
Billionaire investors like George Soros are known to have used the put call ratio to predict the market sentiment. It is said that investors who have a constant eye on the put call ratio can gauge changes in market sentiment faster than other investors and have a lead time in modifying their positions and thereby benefitting from the change.
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