Option forecast. Forecasting Market Direction With Put/Call Ratios


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By total, we mean the weekly total of the volumes of puts and calls of equity and index options. We simply option forecast all the puts traded for the previous week and divide by the weekly total of calls traded.

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When the ratio of put-to-call volume gets too high meaning more puts traded relative option forecast calls option forecast market is ready for a reversal to the upside and has typically been in a bearish decline. When the ratio gets too low meaning more calls traded relative to putsthe market is ready for a reversal to the downside as was the case in early In demo account for forts opening chart below, we can see the extremes over the past five years, which shows this measure on a weekly basis, including its smoothed four-week exponential moving average.

While never exact and often a bit early, the levels should nevertheless be a signal of a change in the market's intermediate-term trend.

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It is always good to get a price confirmation before concluding a market bottom or top has been registered. More elaborate mathematical massaging of the data i.

As the bear market has shifted the average ratio to a higher range, the horizontal red lines are the new sentiment extremes.

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The past range, indicated by the horizontal blue lines, had threshold values of 0. The new threshold values are 0. Currently, the levels have just retreated from excessive bearishness and are thus moderately bullish.

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This is because the index put option hedging done by portfolio managers. We should, therefore, be looking at the equity-only ratio for a purer measure of the speculative trader.

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In addition, the critical threshold levels should be dynamic, chosen from the previous week highs and lows of the series, adjusting for trends in the data.

As with any indicators, they work best when you get to know them and track them yourself.

Options market data can provide meaningful insights on the price movements of the underlying security.

They should thus be included in any market technician's analytical toolbox. Compare Accounts.