put/call ratios and option volume

Hey yall,
I’m new here. I am a stats and econ senior at UCB. If you come ever come by, pm me! I have been reading some of the threads and really enjoy the content! Thanks for all the material esp from the people that have been here a while.

My first question:

Part a)
When I see the volume of a stock increase a substantial amount and I also see the stock go up I think of this as a bullish signal. However, I lack this intuition when it comes to option volume and put/call ratios. It seems to me that, in itself, the put/call ratio is kind of useless. We know that Put/call = (daily volume puts/daily volume of call). If this ratio is high, it could just mean that a lot of people who owned puts that day transferred ownership by selling (And nothing really happened!). It doesn’t have to say anything about contracts opened that day, although these are included in the daily option volume (I think this is true, see part b). Without looking at other indicators (e.g open interest) I don’t understand how this ratio is supposed to reveal anything about public sentiment.

Can anyone reveal the fallacy with my comprehension or provide me with an example that demonstrates how this ratio is useful? I feel a much better indicator of public sentiment would be: (daily number of put contracts opened/daily number of call contracts opened). Does this ratio exist?

Part b)
Take this scenario: I “sell to close” one options contract and a seller of the same type of contract simultaneously hits “buy to close” effectively killing the contract. Does this transaction add to daily option volume? What about when I “buy to open,” does this transaction get added to daily volume?

a) The ratio is useless. At best, it allows you to make a guess, which is likely wrong.
b) Yes, volume includes transactions like you describe.

Martinghoul said:

a) The ratio is useless. At best, it allows you to make a guess, which is likely wrong.
b) Yes, volume includes transactions like you describe.

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Thanks for the reply! do you think this ratio would be more informative-> (daily number of put contracts opened/daily number of call contracts opened)? Is there a ratio that you find useful?

bezzer11 said:

Thanks for the reply! do you think this ratio would be more informative-> (daily number of put contracts opened/daily number of call contracts opened)? Is there a ratio that you find useful?

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This information is available on a daily basis, really, but, again, it's impossible to make heads or tails of it. With put-call parity I can be long a put using calls and vice versa, so you have to treat any such ratio with great care. As to what I find useful, I dunno. Sometimes the CFTC data is useful, but, yet again, you can never read too much into these things.

Martinghoul said:

This information is available on a daily basis, really, but, again, it's impossible to make heads or tails of it. With put-call parity I can be long a put using calls and vice versa, so you have to treat any such ratio with great care. As to what I find useful, I dunno. Sometimes the CFTC data is useful, but, yet again, you can never read too much into these things.

Click to expand...

Great. I'll check it out. Thanks again! good point about put-call parity.