The experts talk about using the put call ration to gauge the market direction. How well does it work? Here are some graphs to compare. The first one is the number of puts on all optionable stock divided by the number of calls on all stock.
Put-Call Ratio for Equity Options
These are the weekly numbers from 11 January 2008 until 20th February 2009. These equity puts and calls are bought by the smaller trader for the most part. So you want to bet against this.
The next chart is of the weekly put call ratio of the S& P 100 index of the largest companies in the S&P500 index. This is used for hedging large portfolios, so this is a gauge of the fears of larger money managers.
S&P 100 Put Call Ratio
If these numbers are useful they have to predict something. Here is the graph of the closing price of SPY over the same period of time. SPY is an ETF, and exchange traded fund, that holds the stocks in the S&P 500.
Closing Prices SPY
We are trying to predict the changes in these prices, so that would be a more useful thing to plot. Here are the percent changes in the price of SPY from week to week.
S&P500 Weekly Return
There are a few things to notice here. The times of greatest volatility, October and November of 2008, the put call ratios where high. There are big movements in both directions, up and down, during that time. Also, there are times when the put call ratios are high when there isn’t a large move in the index.
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