While put/call ratios are generally thought to be contrarian signals, there is one measure which many believe gives an accurate view of the market. This indicator is the S&P 100 Index option put/call ratio, and it measures the number of puts vs. calls traded on the S&P 100 (NYSEARCA:OEF). When this indicator rises, it is supposed to signal that the smart money is taking profits, and a correction is ahead. But how reliable is the indicator? We'll let you see for yourself.
In the charts below, we plot the S&P 500 (top chart) vs. the OEX put/call ratio. The red dots in the S&P 500 (NYSEARCA:SPY) (NYSEARCA:IVV) chart indicate days where the 10-day average put/call ratio exceeded 1.5 i.e., for every call traded, one and a half puts were also traded. As the chart details, this indicator did an excellent job of predicting the October '05 and May '06 corrections, but since then there have been several occurrences where this indicator exceeded 1.5 yet the market has kept on chugging.