How do I understand the put/call ratio in the open interest?
Posted by - NA - on 23 June 2018 12:19 PM
Open Interest is now integrated into the OVI, but generally speaking, a disproportionately larger amount of calls than puts is a bullish sign and a disproportionately large amount of puts in relation to calls is a bearish sign.
The OVI readings act to reinforce decisions we make based on the chart pattern.
They are only indicators and could also represent a hedged position.
OTM = Out of The Money
ATM = In The Money
ITM = In The Money
We expect higher strike options to have calls outweighing puts, and lower strike options puts outweighing calls (although typically by a lesser margin). If the figures are the other way around then we’re interested.
So if higher strikes have more puts than calls, AND there is a bear flag AND I have a breakout AND the set-up is supported by the OVI then there’s a good possibility of a profitable trade. Similarly for lower strikes if the calls are significantly outweighing the puts AND I have a bull flag AND I have a breakout AND the set-up is supported by the OVI then again, we could have a good trade.
In normal markets we’d expect more calls than puts. However, if there are significantly more ATM puts than calls AND we have a bear flag AND we have a breakout AND the set-up is supported by the OVI then we could possibly have an interesting trade. Similarly if the ATM calls significantly outweigh the ATM puts AND there’s a good-looking bull flag AND there’s a breakout AND the set-up is supported by the OVI we would be interested.