What is the purpose of the CBOE Put/Call Ratio?

What is the purpose of the CBOE Put/Call Ratio?

• A. A measure of market liquidity.
• B. An indicator to identify periods when many investors are buying put options, signaling a market bottom.
• C. A volatility index.
• D. A tool to set option prices.

Answer: (B)

The Put/Call Ratio is a sentiment gauge for the options market. It compares the volume or open interest in put options to that in call options, so when more puts are bought relative to calls, the ratio rises and traders interpret this as bearish or fearful sentiment. This is why the statement about identifying periods when many investors are buying put options, signaling a market bottom, is the best fit. Extreme high readings can reflect pessimism that has gone too far, and as contrarian traders anticipate a possible reversal, a bottom may form after the selling pressure exhausts. The ratio isn’t a measure of liquidity, it isn’t a volatility index, and it doesn’t set option prices; it’s used to gauge sentiment and potential turning points.

The Put/Call Ratio is a sentiment gauge for the options market. It compares the volume or open interest in put options to that in call options, so when more puts are bought relative to calls, the ratio rises and traders interpret this as bearish or fearful sentiment.

This is why the statement about identifying periods when many investors are buying put options, signaling a market bottom, is the best fit. Extreme high readings can reflect pessimism that has gone too far, and as contrarian traders anticipate a possible reversal, a bottom may form after the selling pressure exhausts. The ratio isn’t a measure of liquidity, it isn’t a volatility index, and it doesn’t set option prices; it’s used to gauge sentiment and potential turning points.