Put/Call ratio - A useless metric

[Quanto]

The Put/Call ratio (PCR) represents the proportion between all the Put options and all the Call options purchased on any given day. It's an indicator that can provide traders with an idea of overall market sentiment.

IMO it's a braindamaged useless metric based on illogic, b/c it does not differentiate between ITM, ATM, OTM (ie. its moneyness). Therefore it cannot be used for determining the market sentiment (ie. whether the underlying instrument will rise or fall).

But it certainly could be made very useful if it only would consider somehow in a defined standardized way also the moneyness, IMO.

What do others think about it?

See also https://bullishbears.com/put-call-ratio/

 

[ph1l]

Here is a 2019 study that concludes both the volume put/call ratio and open interest put/call ratio are predictive.
https://www.mdpi.com/2227-7099/7/1/24

Put–Call Ratio Volume vs. Open Interest in Predicting Market Return: A Frequency Domain Rolling Causality Analysis
...
This study examined the efficacy of the Put–Call Ratio (PCR), a widely used information ratio measured in terms of volume and open interest, in predicting market return at different time scale. Volume PCR was found to be an efficient predictor of the market return in a short period of 2.5 days and open interest PCR in a long period of 12 days. Thus, traders and portfolio managers should use the appropriate PCR depending upon the time horizon of their trade and investment. The results are robust even after controlling for the information generated from the futures market.

 

[Quanto]

ATTN/CHECK: I think the image in the OP has the top charts, incl. the image in the middle, switched. It's not my design, but was found on the net.

@ph1l, thx for the paper. I'll read it tomorrow (Tu).

 

[Quanto]

Here is a 2019 study that concludes both the volume put/call ratio and open interest put/call ratio are predictive.
https://www.mdpi.com/2227-7099/7/1/24

I now browsed thru the paper, and must say that their findings and their method is far from being accurate.
Imagine for example how they treat this case:
S=10
Call K1=7.5, Volume=50
Call K2=12.5, Volume=150
As can be seen K1 is at the left side of S (ie. ITM) and K2 is at the right side of S (ie. OTM), but they count them all together, ie. Calls.VolumeTotal=200 and after applying the same algo to the Puts, they want use it for predicting Sx from Calls.VolumeTotal and Puts.VolumeTotal.
This is BS logic & maths, IMO

I mean one can do it the right way by collecting realtime data and categorizing each options trade into 2 classes of ITM and OTM (and putting half of an "exact ATM" into both; this will happen very seldom as it means S exactly equals K).
And from that realtime data then one can create for example realtime 5-minute bar data for external distribution/publishing etc.

That means we would have 5-minute data that has both the number of Call trades as well the number of Put trades for the past 5 minutes, alongside their totals for the day.

Even just watching the latest data alone, one can easily see which side (ITM or OTM) has more trades, giving a predictive power for the direction towards the ExpiryDate of these options. But one can treat it also as a (smoothed) timeseries data feeding a T/A indicator etc., not only for the day, but including also past days or weeks etc.
And doing this for all ExpiryDates of the same underlying would make it even more accurate.

Ie. this is like calculating a realtime index. So, it can be done only by those who have realtime access to all the data of the filled option trades.

If I only had the resources I certainly would do it...
.

 

[Quanto]

ATTN/CHECK: I think the image in the OP has the top charts, incl. the image in the middle, switched. It's not my design, but was found on the net.

I now re-checked the image and found it indeed to be wrong, IMO, so I just fixed it.
Here's the fixed image. It now is "natural & more realistic", IMO:

 

[murray t turtle]

%%
Could be useful;
IBD newspaper put it below SPY related benchmark for many, many years.
But frankly, I have enough indicators + actually have removed some , not added any like that LOL
Rube Goldberg made money on his art, so each to his or her own.

 

[Quanto]

%%
Could be useful;
IBD newspaper put it below SPY related benchmark for many, many years.
But frankly, I have enough indicators + actually have removed some , not added any like that LOL
Rube Goldberg made money on his art, so each to his or her own.

Actually it could be a very useful metric if done like described above.
I wonder that nobody else seems to have had this idea, nope, just kidding, I'm sure some trading companies with a good R&D department, ie. those with some good programmers and quants, do this already privately in-house for themselves...

I think @Matt_ORATS firm could publish such an index.
It could be named "ORATS Put/Call Ratio (PCR) Realtime Index" or so
Ie. appending some new columns to their current options data tables.

 

[Slow Learning Elf]

The index in its basic form (OI of calls va OI of puts) is flawed, but has some predictive quality. There are better forecasts that can be achieved with more involved data (especially if you have access to tagged OPRA feed and/or pcaps from each exchange), but that’s orders of magnitude more work

 

[murray t turtle]

Actually it could be a very useful metric if done like described above.
I wonder that nobody else seems to have had this idea, nope, just kidding, I'm sure some trading companies with a good R&D department, ie. those with some good programmers and quants, do this already privately in-house for themselves...

I think @Matt_ORATS firm could publish such an index.
It could be named "ORATS Put/Call Ratio (PCR) Realtime Index" or so
Ie. appending some new columns to their current options data tables.

%%
I double checked it again, see if it could be mostly useless??
WELL it made great call , to put it simple on a last day SEPT or 1st Oct bear killer LOL,SPY related .Looks useless on QQQ,DOW or DIA, on that IBD chart page anyway
BUT same 10 months, advance decline line did much better than next 5-8 calls/buys in MAR;
calls\ meaning signals not insurance , eVen though insurance maybe a good idea, general idea.
Rube Goldberg cartoon rigged up a lawn mower to cut hair;
my hair commercial cutter , she uses a bit different LOL