In this article, we'll review some of the major pros and cons of using the put call ratio to help anticipate market turns and trends. Let's start with the pros.
The principal point favoring the use of the put call ratio is that it allows investors to quantify and plot market sentiment, which many investors consider the primary market catalyst.
Secondly, the data used to calculate the put call ratio is widely available to all investors with access to the internet.
The third supporting point is that, because historical data is rather abundant, the ratio can be charted easily using most major trading platforms or charting packages.
The fourth advantage of using the p/c ratio is that it is simple enough for all traders, even beginners, to apply.
And last (although not necessarily least) the fifth point in support is that it's a contrarian indicator and can help investors anticipate market moves ahead of the crowd. Other indicators rely on data that will cause investors to "follow" the herd.
Here are the main disadvantages of using the put call ratio.
One of the major cons of using the p/c ratio is its simplicity. The simple calculation doesn't always reflect a such a complex dynamic as investor psychology.
The second point in contra is that most people calculate the ratio using options volume, which doesn't take into account that most investors make decisions on the dollar amounts investors and not quantity of contracts. A dollar-weighted ratio can resolve this issue.
The third con of using the put call ratio is that it must be used alongside other indicators of market psychology to be of value.
A fourth negative point is that not all stock issues have options available. It's, therefore, impossible to calculate a Put Call Ratio for many stocks.
And the 5th and final consideration against using the ratio is that, even if a stock has options available, there must be enough volume activity for the ratio to be meaningful.
So there you have it, the pros and cons of using the put call ratio to identify market opportunities.
So, should you use the put call ratio to help identify market turns?
The p/c ratio is a worthy indicator in most investors toolbox. However, it should always be applied with understanding of the ratio's constraints.
The principal point favoring the use of the put call ratio is that it allows investors to quantify and plot market sentiment, which many investors consider the primary market catalyst.
Secondly, the data used to calculate the put call ratio is widely available to all investors with access to the internet.
The third supporting point is that, because historical data is rather abundant, the ratio can be charted easily using most major trading platforms or charting packages.
The fourth advantage of using the p/c ratio is that it is simple enough for all traders, even beginners, to apply.
And last (although not necessarily least) the fifth point in support is that it's a contrarian indicator and can help investors anticipate market moves ahead of the crowd. Other indicators rely on data that will cause investors to "follow" the herd.
Here are the main disadvantages of using the put call ratio.
One of the major cons of using the p/c ratio is its simplicity. The simple calculation doesn't always reflect a such a complex dynamic as investor psychology.
The second point in contra is that most people calculate the ratio using options volume, which doesn't take into account that most investors make decisions on the dollar amounts investors and not quantity of contracts. A dollar-weighted ratio can resolve this issue.
The third con of using the put call ratio is that it must be used alongside other indicators of market psychology to be of value.
A fourth negative point is that not all stock issues have options available. It's, therefore, impossible to calculate a Put Call Ratio for many stocks.
And the 5th and final consideration against using the ratio is that, even if a stock has options available, there must be enough volume activity for the ratio to be meaningful.
So there you have it, the pros and cons of using the put call ratio to identify market opportunities.
So, should you use the put call ratio to help identify market turns?
The p/c ratio is a worthy indicator in most investors toolbox. However, it should always be applied with understanding of the ratio's constraints.
About the Author:
There are lots of online resources available to help investors study Market Sentiment. Take your time to study such topics as contrarian indicators, technical analysis and sentiment indicators.
No comments:
Post a Comment