Put/call ratio is widely use sentiment indicator, but i think it is anyway usefull coz its not derivative indicator which does not distort market information. We just see volume of call options versus volume of put options without distortion.
$PC (in esignal) - put/call ratio calculeted on CBOE. It is contrarian indicator. When the ratio is too small we have critical optimism on markets and soon we will see reversal of the market. It ofcoz working to find critical pessimism too.
Historically index options have a skew toward more put buying. This is because of the index put option hedging done by portfolio managers - this is also why the total put/call ratio is not the ideal ratio (it is polluted by this hedging volume). Recall that the idea of contrarian sentiment analysis is to measure the pulse of the speculative option crowd, who, on balance, is wrong. We should therefore be looking at the equity-only ratio for a purer measure of the speculative trader. In addition, the critical threshold levels should be dynamic, chosen from the previous 52-week highs and lows of the series, adjusting for trends in the data.
The smoothed(build MA4 or MA10) put/call ratio is useful good. Put/call ratios are best used in combination with other sentiment indicators and perhaps a price-based (i.e., momentum) indicator. More elaborate mathematical massaging of the data (i.e., de-trending by differencing the series) can also help.
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