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 a Call Option?25 Views
finance a la shmoop. what is a call option? option? option, where are you? okay
yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]
is the right to call or buy a security. the concept is easy the math is hard.
you think Coca Cola's poised for a breakout as they go into the new low
calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]
call option for $1. well that call option buys you the right
to then buy coke stock at 55 bucks a share anytime you want in the next
hundred and 20 days. so let's say Coke announces its new sugarless drink flavor
zero it's two weeks later and the stock skyrockets to fifty eight dollars a
share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]
so you buy the stock and you're all in now for fifty five dollars plus one or
fifty six bucks a share and your total value is now fifty eight bucks. well you
could turn around today and sell the bundle that moment, and you'll have
turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]
stock not skyrocketed so quickly well you would have lost everything. still you
lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]
options. as for Coke flavor zero turned out to be nothing more than canned water.
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 the Bid-to-Cover Ratio? The Bid-to-Cover ratio compares the amount of bids made for Treasury securities to the amount that is actually sold...
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...