put/call ratio get lots of press
Trader blogs are paying close attention to this put/call ratio (Vix and More and MarketSci). Even the derivative exchanges like Chicago’s CBOE publish call/put ratio’s. They even run a derived call/put ratio index. They are missing the point. The only reason this call/put ratio is mentioned now and then is the commercial newsletters have to be filled with “analysis”. Retail traders are having a hard time making a living anyway, and will put their faith in any possible combination of indicators that will justify their trading decisions.
Why put/call ratio makes no sense
- In the professional market calls aren’t really different from puts. A delta-hedged call has the same pay-off as a delta-hedged put in the same strike. If there’s no distinction between calls and puts, the ratio doesn’t make sense.
- For every single buyer of an options contract, there is a seller too. Hard to say who is right.
- As expected, there has been no statistical evidence of any relationship between call/put ratios and stock performance.
- All market participants have slightly different objectives. Arbitrage against other instruments, hedging underlying portfolio’s, outright speculators.. The casino-idea that professional traders are selling options to the retail investors, is not true.
As a true kind of financial “common knowledge”, the call/put ratio won’t ever disappear. All tools can and will be used to find the holy grail of the market’s crystal ball.