Options offer traders lots of… well, options! Call options provide the opportunity to leverage your profits when a stock goes up; put options allow you to make money as a stock goes down. What’s more, you can even write covered calls on stocks that you hold in order to provide low-risk income, and you can use puts as a form of “insurance.”
Options are great, but they’re not for everybody — and they’re not the subject of this week’s episode. However, the Put/Call Ratio is. It may sound as if it has to do with options, and it does: but it can be used to inform your stock trades. In this episode, I’ll explain how.
In this episode, you’ll learn:
- About puts and calls: a brief review or introduction for those not familiar with options (0:37).
- What the Put/Call Ratio is, how it’s calculated, and how it can be read (1:17).
- The different “universes” of options that can comprise a Put/Call Ratio, and the specific characteristics of each (1:50).
- How to interpret the Put/Call Ratio to determine if the market is oversold, overbought, or neither (2:25).
This video also includes real-life examples of Put/Call Ratios using all three major “universes” of options: the $CPCI, the $CPCE, and the $CPC. Confused? Watch the video and you’ll understand!
The Put/Call Ratio measures put volume relative to call volume. This can help you determine if the market appears to be overbought, oversold — and to what extent — or neither. Ingeniously, it also allows you to gauge how the sentiment of professional traders compares to that of amateur traders, and how the two synthesize to form an overall consensus. Best of all, this indicator is easy to read and understand — once you learn a few basic rules, all of which are covered in this episode.
CEO, Wealthpire Inc.
P.S. In our next video, we’ll look at the Aroon indicator, which helps determine if a stock is trending or range-bound. Until next week…