Current Ratio – Formula, Meaning, Assumptions and Interpretations
The current ratio is the most popularly used metric to gauge the short term solvency of a company. This article provides the details about this ratio. Formula Current Ratio = Current Assets / Current Liabilities Meaning Current ratio measures the current assets of the company in comparison to its current liabilities. This means that the…
What are Common Size Statements ?
Common size statements are not financial ratios. Rather they are a way of presenting financial statements that makes them more suitable for analysis. However, analysts always use them in conjunction with ratio analysis. In fact, financial analysts use common size statements as the starting point to help them dig deeper. Common size statements tell them…
Cash Ratio – Meaning, Formula and Assumptions
The cash ratio is limited in its usefulness to investors and financial analysts. It is the least popular of the liquidity ratios and is used only when the company under question is under absolute duress. Only in desperate circumstances do situations arise where the company is not able to meet its short term obligations by…
The put call ratio is the only financial ratio that does not compare the current market price to any financial statement item. Rather it compares what investors plan to do with a given stock or an index at a later date. Put and call are derivative options. The put option gives the seller a right but not an obligation to sell, however the call option gives the buyer a right but not the obligation to buy. Analyzing the put call ratio can give the investors some insight about where the stock is headed for in the near future. This ratio is more relevant to short term price movements rather than long term ones and is hence more widely used by speculators who are looking to make a quick buck.
Put Call Ratio = Number of Put Options / Number of Call Options
This data is periodically published by the exchange. Hence investors can easily have a look at these numbers.
A high put call ratio signals a bearish trend in the future and indicates that short selling must be done to profit from this change. On the other hand, a low put call ratio indicates a bullish trend which speculators perceive as a signal to go long.
Many speculators believe that the put call ratio does not represent the true picture. This is why there are a few variations of the put call ratio that are used. Before making a call based on any put call ratio, investors must understand what variation is being used and therefore how to interpret it. Common variations are as follows:
Moving Average: Instead of using the put call data for a single day, speculators usually use data for an extended period of time. Usually the moving average used is that of 21 days. However, the number of days can be different.
Money Weighted: Some speculators feel that money weighted put call ratio is a better indicator since it informs about the possible number of options that will be exercised.
Billionaire investors like George Soros are known to have used the put call ratio to predict the market sentiment. It is said that investors who have a constant eye on the put call ratio can gauge changes in market sentiment faster than other investors and have a lead time in modifying their positions and thereby benefitting from the change.
Article Written by
Himanshu Juneja, the founder of Management Study Guide (MSG), is a commerce graduate from Delhi University and an MBA holder from the esteemed Institute of Management Technology (IMT). He has always been someone deeply rooted in academic excellence and driven by a relentless desire to create value. Recently, he was honored with the “Most Aspiring Entrepreneur and Management Coach of 2025 (Blindwink Awards 2025)” award, a testament to his hard work, vision, and the value MSG continues to deliver to the global community.
Article Written by
Himanshu Juneja, the founder of Management Study Guide (MSG), is a commerce graduate from Delhi University and an MBA holder from the esteemed Institute of Management Technology (IMT). He has always been someone deeply rooted in academic excellence and driven by a relentless desire to create value. Recently, he was honored with the “Most Aspiring Entrepreneur and Management Coach of 2025 (Blindwink Awards 2025)” award, a testament to his hard work, vision, and the value MSG continues to deliver to the global community.
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