The put-to-call ratio for US equities (Put/Call Ratio) has risen to 0.86. This is the second-highest reading of the current year — it was higher only in mid-March.
The indicator reflects the balance between purchases of protective put options and bets on gains through call options. A put option is insurance against a decline in stock prices; it is bought when there are fears of a market downturn. A call option, by contrast, represents a bet on growth. When the ratio rises, it signals strengthening demand for protection.
In a single day, the indicator gained 0.05, or 6.17%. Throughout the summer and autumn, it held in the 0.50–0.70 range. And in late May it fell below 0.40 — at that time, investors, by contrast, showed almost no concern.
Such a sharp jump usually occurs after a significant market decline. Investors get scared and begin buying protective instruments en masse.
Why fear in the market is considered a good sign
According to an assessment by Puru Saxena, founder of the investment service AlphaTarget and formerly a fund manager in Hong Kong, there is very little left to the bottom. When almost everyone has already hedged against a decline, there is no one left to sell protection. Those who wanted to exit have already exited. The rest are sitting in defensive positions and waiting. At such a moment, any piece of good news can turn the market upward.
That is precisely why traders call the Put/Call Ratio a contrarian indicator. The stronger the fear, the closer the reversal. And vice versa: when almost no one is buying insurance, as in May, the market may be overheated.
A reading of 0.86 does not guarantee that the decline is over. In March the indicator rose even higher — to roughly 0.90 — and the market needed time to calm down. But such peaks rarely last long. They mark the moment when it is already too late to sell but still scary to buy. On such days, experienced traders do not open new bets on a decline and begin looking toward purchases, checking the signal against other data — trading volumes, index movements, and the VIX volatility index.
Cryptalist analysis: The current dynamics of the Put/Call Ratio reflect the classic picture of retail investor capitulation ahead of a potential reversal. However, the sustainability of the recovery will depend on confirmation of the signal by volumes and a decline in the volatility index. Institutional participants traditionally view such extremes as an accumulation zone rather than a zone of further decline.