Strategies Used by American Companies for Tax Avoidance
America has been the hub of financial and entrepreneurial activity ever since the end of World War 2. However, over the past few years, the number of corporations that are using America as their base has been steadily declining. This is because of the unfavorable tax policies in America. America is the only country in […]
Proof of Work Mechanism in Cryptocurrency
Investors who are new to cryptocurrencies tend to find the entire ecosystem confusing and deceptive. When investors try to educate themselves on topics related to cryptocurrencies, they feel like they are attending more of a technical subject course instead of learning about finance. This is the reason why traditional investors have been avoiding cryptocurrencies for […]
Estimating Project Cash Flows: Part 3
Continuing from the previous two articles, we will look at some more counterintuitive steps that need to be taken to calculate the cash flows which should then be discounted to arrive at the worth of the project. This article will cover the concepts of how sunk costs should be treated as well as how allocated […]
Anatomy of a Sports League Franchise Agreement
We have already discussed that sports leagues across the world follow the franchise model. Franchising is at the core of billion-dollar sports leagues which take place across the world. It is important to realize that franchising provides the legal and business framework which ensures coordination between the actions of different league participants. It is important […]
Traditional Bonds vs. Islamic Bonds Called “Sukuk”
The word Sukuk is an Arabic word which means certificate. These are certificates which are offered by corporations and governments which follow Islamic principles. For instance, Saudi Arabia has issued a new tranche of Sukuk in the year 2017. This was done to provide medium-term financing to the government to meet its debt obligations. The […]
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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