What it means
Put/call ratio is calculated as total put volume divided by total call volume over a defined period (daily, weekly). High ratios (>1.0) indicate dominant put-buying = bearish positioning. Low ratios (<0.5) indicate dominant call-buying = bullish positioning. The CBOE publishes both equity-only and index put/call ratios — equity-only is more retail-driven; index ratio includes institutional hedging flow.
Why it matters
Put/call ratio is a sentiment-extreme contrarian indicator. Extreme high ratios (>1.5 on equity-only) typically mark capitulation lows; extreme low ratios (<0.45) often mark complacency tops. The signal is contrarian: when everyone is buying puts, the price has already dropped and reversal is likely. Less actionable in mid-range; powerful at extremes.
How to use it
Track 10-day moving average of equity-only put/call ratio. Extreme highs (>1.20) = bullish setups; extreme lows (<0.50) = bearish setups. Combine with VIX, AAII sentiment, and price structure for confluence. Avoid single-day readings — daily volatility produces too many false signals.
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