The ratio of put option volume to call option volume — a sentiment gauge where extreme readings (very high or very low) signal contrarian inflection points.
Deeper Explanation
Investors buy put options to protect against or profit from declines; they buy calls to profit from advances. A very high put/call ratio (say, 1.5+) means investors are overwhelmingly buying protection against decline — suggesting extreme fear. Historically, such extremes have been followed by market rallies: the pessimism was priced in. A very low put/call ratio (say, 0.5) means investors are heavily positioned for further gains — suggesting complacency. The contrarian watches the put/call ratio for extreme readings, then looks for individual stocks or sectors showing the most pessimistic options positioning as candidates for specific contrarian trades.
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