Been examining the put/call ratio for SPY to understand market sentiment.
It looks like a high ratio indicates bearishness, suggesting a potential bullish opportunity. A low ratio seems to signal the opposite.
Does anyone use this method? Is it effective or am I complicating things?
Put/call ratio works better as a contrarian indicator rather than following the crowd. When everyone’s buying puts and getting bearish, that’s often when the market bounces.
The tricky part is timing though. Markets can stay irrational longer than expected, so combining it with price action helps avoid early entries.
Usually check it weekly rather than daily since short term noise can throw off the signal.
This ratio burned me hard when I first started trading SPY options. I’d see extreme readings and jump in too early.
Learned the hard way that waiting for confirmation matters more than the actual ratio number. Now I watch for divergences between the ratio and price movement.
My biggest win came when ratio hit 1.8 but SPY kept grinding higher for three days before the real move down started.
Data shows SPY put/call ratio above 1.3 signals oversold conditions 68% of the time.
Best results:
• Combine with VIX above 25
• Wait for volume confirmation
• Exit within 3-5 trading days
Ratio alone has 52% accuracy. Not reliable as standalone signal.
Forget the exact numbers on this indicator. What matters is extreme readings combined with what price is actually doing. I’ve seen the ratio hit 2.0 and the market still pushed higher for weeks.
The real edge comes from watching how institutions react when retail gets too positioned one way. If you see heavy put buying but volume patterns show smart money accumulating, that tells you more than any ratio.
Keep it simple - use it as one piece of the puzzle, not your main signal.