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Randy Frederick, Vice President of Trading and Derivatives

Randy Frederick

Vice President of Trading and Derivatives

Randy focuses primarily on client education and market analysis. He is a frequent guest on CNBC and Bloomberg TV.

Get the latest market commentary and join the conversation.

Stock Market Report

August 31, 2018


RANDY FREDERICK: If you’re an active, or just an engaged trader, you probably watch many different indicators to help you determine the short-term sentiment in the market. One indicator that many people like to talk about, but many probably really don’t understand, is the put/call ratio. So, I thought I’d spend some time today trying to clear up some common misunderstandings.

First, an option contract is a contract to buy or sell, usually 100 shares of the underlying stock or ETF, and it’s only good for a specific price and for a specific period of time. A put/call ratio is typically calculated as the total number of put option contracts divided by the total number of call option contracts for a particular stock, ETF or index. Now, the first misconception about the put/call ratio, is that there’s just one put/call ratio. When I hear someone talk about the put/call ratio, the first thing I always ask them, is which ratio exactly, are talking about? Because there are two types; one based on open interest and the other based on volume. So, let’s discuss the differences between the two.

Open interest is a measure of the total number of option contracts outstanding, either long or short, for a particular strike price and for a particular expiration date; and while open interest is only calculated once at the end of each trading day, it can be a helpful measure of intermediate-term sentiment because it starts at zero when the option contract is first created, and it lasts until the contract expires. A high open interest means that there are many contracts outstanding, but it tells you nothing about the activity occurring during the current trading day. A high open interest put/call ratio means there are more outstanding put options than there are outstanding call options, but open interest put/call ratios can cover all expiration dates or just a specific expiration date, and they can cover all strike prices or just a single strike price on a particular security.

By contrast, option volume is the measure of trading activity during the current day only. Heavy volume can be a helpful measure of short-term sentiment because it means many traders have an opinion about a particular stock or ETF and they are acting on that opinion. A high volume put/call ratio means that more puts are trading than calls, and while it’s often possible to know whether the activity is mostly buying or mostly selling, it’s not possible to know if the activity is due to traders establishing new positions, or closing out existing positions. And like open interest ratios, a volume put/call ratio can be based on a single strike or expiration, or all strikes and all expirations.

And if all of this wasn’t complicated enough, put/call ratios can be calculated for specific options exchanges, or for all options exchanges, and for individual securities, specific Indices, or for all securities and all indices combined. And even if you could keep all of this straight, how would you know if a high put/call ratio was bullish or bearish, because they’re not all the same?

The answer is, you really can’t. And that is why I cover all of this information in my Weekly Trader’s Outlook report, which you can find at Schwab.com/randyfrederick. To see future Stock Market Reports, be sure to subscribe to the Charles Schwab YouTube channel..

Important Disclosures

Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled Characteristics and Risks of Standardized Options before considering any option transaction.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

©2018 Charles Schwab & Co., Inc. (“Schwab”). All rights reserved. Member SIPC (0818-8B9J)
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Randy Frederick
Schwab's Vice President of Trading and Derivatives
TIME IS UP
Randy Frederick
Schwab's Vice President of Trading and Derivatives
Q
Question 1
Question 2
Question 3
Question 4
Question 5

Which of the following is used in technical analysis?

Which of the following is NOT a key characteristic of options trading?

Options trading can be used for:

Writing options on stocks you already own is called a:

When a put options’ strike price is above the market price of the underlying security, it is:


Countdown clock TIME IS UP
A
Valuation
B
Trend Lines
C
Financial Strength
D
Earnings Growth
Correct!

Trend lines visually show support and resistance in a certain time frame.

A
Open Interest
B
Time Value
C
Close Interest
D
Intrinsic Value
Correct!

These other three statistics are commonly used by options traders.

A
Speculation
B
Income Generation
C
Neutral Strategies
D
All of the above
Correct!

Options can be used for speculation, income generation, neutral or directional strategies and much more.

A
Covered Call
B
Bull Spread
C
Butterfly Spread
D
Contingency Order
Correct!

Because you own the underlying asset, a covered call is a limited risk strategy.

A
A Net Credit
B
In-The-Money
C
Out-Of-The_Money
D
At-The-Money
Correct!

“In-the-money” refers to an option’s intrinsic value.

You got 2 questions right!

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