This indicator is used by investors to bet against mass psychology. Apart from measuring the general level of activity in the market, it also gives buy and sell signals as regards the general market and also for individual stocks.
Thus, when there is a high level of put buying and an increased incidence of pessimism among options traders, the put-call ratio exhibits a rising trend, that is, bearishness.
However, when the entire market is bearish, a contrarian may use the high put-call ratio as an indicator to buy, since the crowd is generally wrong at turning points in the market, market sources said.
On the other hand, when call activity rises significantly, it suggests a euphoric sentiment, as reflected by a dropping put-call ratio. This makes the contrarian cautious and generates a sell signal.
