How do I interpret the put/call ratio in the open interest?

How do I interpret the put/call ratio in the open interest?

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 and Big Money Footprints.

They are only indicators and could also represent a hedged position.

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Notations

OTM = Out of The Money

ATM = At The Money

ITM = In The Money


Understanding the Open Interest (OI)

 · Open interest for OTM calls is always likely to be higher than for ITM puts (both having higher strikes than the current stock price).

· Open interest for ATM calls is likely to be higher than ATM puts in normal market conditions.

 · Open interest for ITM calls is likely to be marginally less than for OTM puts (both having lower strikes than the current stock price).

Traders will often get involved in selling OTM options for a premium as they think that the stock won’t get beyond that price and they’ll be able to keep the premium.  It’s a risky thing to do 'naked' as the potential loss is unlimited. This activity can also skew the Open Interest figures.

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 and Big Money Footprints, 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 and Big Money Footprints, then again, we could have a good trade. 


ATM options are typically involving those where the trader is long the options. That’s why we focus a lot on these as a good barometer of buying action.


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 and Big Money Footprints, 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 and Big Money Footprints, we would be interested.