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So I was reading about the put/call ratio and how it can be used as a sentiment indicator.

So a ratio of 0.7 or less is bullish. If it is between 0.7 and 1.0 it is neutral and if it is greater than 1.0 it is bearish.

This metric shows whether the call/put purchasers are bullish or bearish, but the option writers would have the opposite sentiment. So why is only one side taken into consideration?

I think I have an intuition as to why this is. The writers are more motivated by gathering up the time value and less about which direction the stock moves? They'd rather the stock price stay the same.

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  • I'll spare you my opinion of this indicator. Obtain the historical data for the P/C ratio and compare it to the historical performance of a proxy for the market (SPY, OEX, etc.). See if you can trade it profitably. – Bob Baerker Jan 7 '20 at 5:38
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I think the contrarian theory behind the indicator is that option buyers are the dumb money and option sellers are the smart money. So, e.g., a high put/call ratio indicates that the "fear and greed" crowd is bearish but that the "nerves of steel" professionals are bullish.

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  • I guess that makes a lot of sense. Thank you for the clarification! – Dustin K Jan 7 '20 at 0:11

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