The put call ratio. The contrarian sentiment read.

The put call ratio (PCR) measures the volume of put options traded versus the volume of call options. When traders are bearish, more puts trade. When bullish, more calls. Extreme readings in either direction often precede contrarian reversals. The metric has been published by the CBOE for decades and continues to provide useful sentiment context for traders who know how to interpret it.

What the put call ratio actually is

The CBOE publishes three primary put call ratios daily.

Equity PCR.

Volume of puts on individual stocks divided by volume of calls. The cleanest sentiment read because retail and institutional activity on individual names is more clearly directional.

Index PCR.

Volume of puts on indexes (SPX, NDX, RUT) divided by volume of calls. Skewed by institutional hedging because portfolio managers consistently buy index puts for protection regardless of sentiment.

Total PCR.

All puts divided by all calls across both equities and indexes. The broadest measure but mixed by the hedging bias from the index component.

The metric is published intraday and as a daily close value. Most analysts focus on the daily close as the more reliable reading because intraday noise can produce misleading signals.

The typical range

Equity PCR.

Normal range 0.5 to 0.9. Below 0.5 is extreme bullish. Above 1.0 is bearish. Above 1.3 is extreme bearish capitulation.

Index PCR.

Normal range 1.0 to 2.0. The hedging bias keeps it above 1.0 most of the time. Spikes above 2.5 are fear extremes.

Total PCR.

Normal range 0.7 to 1.0. Above 1.2 is elevated bearish sentiment. Above 1.4 is extreme.

The absolute level matters less than the deviation from the recent average. A reading two standard deviations above the 50 day average is meaningful even if the absolute level is not extreme.

How to interpret extreme readings

The PCR is a contrarian indicator. Extreme readings signal that sentiment has reached an unsustainable level and often precede reversals in the opposite direction.

Extreme high PCR (bearish sentiment).

Traders are buying puts aggressively. Fear is high. Capitulation often follows. The market often bottoms within days to weeks of extreme PCR highs.

The 2020 COVID crash saw equity PCR readings above 1.5 in March. The market bottomed within weeks and produced one of the strongest rallies in history.

Extreme low PCR (bullish sentiment).

Traders are buying calls aggressively. Greed is high. Complacency dominates. The market often tops within days to weeks of extreme PCR lows.

Periods of extreme low PCR (below 0.5) have preceded several major market peaks including early 2018 and late 2021.

The signal timing

PCR extremes do not produce immediate reversals. The timing between the extreme reading and the reversal can range from days to months.

The signal works better when combined with other indicators.

PCR extreme high + VIX above 30 + market in confirmed downtrend = likely bottoming conditions.

PCR extreme low + VIX below 13 + market in confirmed uptrend = topping conditions building.

Standalone PCR signals can be wrong by weeks. Combined signals with other contrarian indicators improve the timing and reliability.

The moving average smoothing

Single day PCR readings can be noisy. Many analysts use 5 day or 10 day moving averages of PCR to filter the noise.

5 day PCR moving average above 1.0 sustained over multiple days is more meaningful than a single 1.0 reading.

The smoothed version produces fewer false signals at the cost of slower confirmation. Use single day for short term tactical reads. Use smoothed for longer term sentiment positioning.

What the PCR does not tell you

Not the direction of the next move. Extreme readings increase the probability of reversal but do not specify the timing or magnitude.

Not the cause of the sentiment. The PCR shows the result of trading activity but not why. The trader still needs to interpret the macro environment and the fundamental drivers.

Not effective in low volume conditions. PCR readings on light volume days are less reliable than readings on high volume days.

Not perfect for individual stocks. The CBOE publishes aggregate PCR. Individual stock options PCR can be calculated but requires more work and is less meaningful than the broad equity reading.

The setup for using PCR

Watch the daily equity PCR.

Most useful single reading. Available free on CBOE website, market sentiment dashboards, and most financial data terminals.

Note extremes in context.

PCR above 1.2 with the market down 5 to 10 percent over the past few weeks is capitulation territory. PCR below 0.5 with the market at all time highs is complacency.

Combine with VIX.

Use PCR alongside the VIX as the second sentiment data point. Extremes in both indicators simultaneously produce the highest probability contrarian signals.

Wait for technical confirmation.

Do not trade on the sentiment signal alone. Wait for the technical reversal (breakout from a bottoming pattern, breakdown from a topping pattern) before entering. The sentiment shows the conditions are right. The technical shows the timing.

Size appropriately.

Contrarian trades have higher tail risk because the trader is positioning against the dominant flow. Use smaller position sizes than trend aligned trades.

The historical examples

March 2009. Equity PCR spiked above 1.5 multiple times during the GFC capitulation. SPX bottomed within weeks. The decade long bull market began.

December 2018. PCR readings reached extremes during the Q4 selloff. SPX bottomed on Christmas Eve and rallied 30 percent in the following months.

March 2020. COVID crash PCR readings hit historic extremes. SPX bottomed and produced one of the fastest recoveries ever.

October 2022. PCR extremes coincided with VIX above 30 and SPX at the bear market lows. Major bottom followed within weeks.

The pattern repeats. Extreme bearish sentiment combined with capitulation conditions often marks the major bottoms in retrospect.

Where the audit fits

The audit is not a sentiment timing service. It does identify whether the trader is using sentiment context in their entries. For most retail traders the pattern is ignoring sentiment indicators entirely or using them in isolation without other confirmation. The plan locks the rule that sentiment is a context filter, not a trade signal. Five to seven pages.