See: Put-Call Ratio.
Add up all the puts out there. Add up all the calls out there. (They track totals on the Street.) When puts are twice as plentiful as calls, then highly educated derivatives traders (making $10 million a year, for starters) are telling the market, via their actions or trades, that they're bearish on things overall. That is, the big, smart brains are betting that the market's going down before it goes up again.
You have the reverse with calls. And yes, the strike prices and durations all have to be adjusted and averaged. But if you're sampling all of them, then the entire universe of them is kind of a normal curve, and is adjusted such that it represents a good sample of sentiment. When they're about the same number, there's just...meh. Confusion. Fear. Uncertainty. Doubt. CFUD. Like the sound when you clear your throat after a huge bowl of ice cream. When the put-call ratio is about even, derivatives traders are giving no real view as to where the overall market is heading. So, um...beware.
Related or Semi-related Video
Finance: What is the Bid-to-Cover Ratio?11 Views
Finance allah shmoop what is the bid to cover ratio
doesn't have to do with how much of the blanket
your loved one leaves you at night No that's bed
to cover ratio Totally different We're talking about a sentiment
index as it relates to us treasury bill auctions and
the overall health of the u s economy As you
hopefully remember us treasury securities air sold at a discount
to par pay no interest along the way and then
just pay full par at the end That is a
bid for a six month t bill might be a
nine hundred eighty eight dollars and twenty cents for a
piece of paper paying a thousand bucks in six months
We'll have the government come up with that nine hundred
eighty eight twenty number Was it from an act of
congress a mandate from the prez of bill no it
was set by bids from investors hoping to be ableto
buy that grand payable in six months for as cheap
a price as possible But once that bid number is
set well then the government decides it wants to sell
me x dollars worth of that particular security and the
price is set The government hopes that there are buyers
or bitters for that security paying some in two ish
percent and change an annualized returns Well if there are
tons of bidders at two percent it signals to the
government that next week well it can probably offer just
one point eight percent for that same paper all else
being equal and you know then they can raise as
much money as they want at that point Well if
there are scant few bidders well then it signals to
the g men that they might have to raise the
rent they pay on the money they're willing to borrow
here A two point once before do two point three
percent or something like that So the bid teo cover
ratio is the number of bids made divided by the
number of bids accepted or covered and it's a carefully
tracked number because it conveys a lot of market intelligence
about investor demand for us paper and you know generally
how healthy things are So to recap bid to cover
ratio bed to cover ratio on this would be a 00:02:08.09 --> [endTime] bed couch ratio
Up Next
What is the Advance Decline Ratio? The advance decline ratio is used to determine how the market performed on a given day. It does this by comparin...
What is a call option? A call option is a type of contract that lets the investor buy shares of a stock at a certain price and within a window of t...
What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...