Another Use for the Total Put-Call Ratio

By Lawrence G. McMillan

The total put-call ratio includes all the volume that takes place on listed index and equity option markets (not futures).  Most of the time it’s not of great interest, although we did publish a system utilizing it in extremely bearish markets.  That system was designed to capture large moves, and its signals usually result in at least a 100-point gain in $SPX.  The last signal of that sort was a successful one, with a buy issued last September 12th.  The 100-point target was achieved on November 3rd.  That system was described in Volume 20, No. 11.  In this article, we are going to present another system for using the Total Put-call ratio – a much shorter-term approach.  Last Monday, April 16th, the stock market had an unusual day.  The previous Friday, the market had stumbled rather badly, and $SPX had closed down 17.  On Monday, though, $SPX was down modestly, but the Dow-Jones Industrials (30 stocks) was up rather strongly.  We’ll have more to say about that phenomenon later, but this divergent action seemed to generate a rash of option trading, and the total put-call ratio was higher than 1.00 for the day.  The next day, $SPX was up over 21 points.  That got us thinking about looking at isolated incidents where the Total put-call ratio spiked above 1.00 briefly.  At first glance, many of these seemed to precede sharp market rallies.  So, we decided to investigate properly...  

Read the entire "Another Use for the Total Put-call Ratio" article (published 4/27/12) by subscribing toThe Option Strategist Newsletter.