Put-Call Ratio Changed In Recent Years? | OptionsANIMAL
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How Has The Put-Call Ratio Changed In Recent Years?

Investors and traders have various ways they use the put-to-call ratio to measure the general sentiment towards the market. However, the scale has changed in recent years.

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In the past, one could gauge the sentiment toward the market, or an underlying issue, by calculating the number of put contracts traded and dividing by the total number of call contracts traded. If the resulting ratio was below 0.6, the investing community was said to be bullish on the issue. If the ratio result was over 1.0, the investing community was said to hold a bearish sentiment toward the issue or market.  Anything between these two was considered a normal range. This might just be one way we long for the simplicity of the ‘good ol’ days.

So, what happened? A portfolio margin pilot program was initiated by the SEC in July of 2005. It was an attempt to create more competitive markets and effectively lower margin requirements, beginning with broad-based index options and ETFs. By 2006, the SEC expanded the program to include equity options and single stock futures. The minimum capital requirements made this margin method available to hedge funds, proprietary trading groups and high net-worth investors. How has this affected the standard criteria by which we measure market sentiment, or the put-to-call ratio?

The number of put options being traded has dramatically increased since the inception of portfolio margining. In a quick review of the data provided by the CBOE on historical puts, traded from 2003 to present, the volume of puts traded took a big increase in 2006. To my knowledge, there has been no quantitative analysis to help recalibrate the old bullish-bearish scale.

Perhaps that will make a good thesis for someone!

Emilu Bailes
OptionsANIMAL Instructor

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