As part of the Chartered Financial Data Scientist course I am taking, I also took on a project in order to see whether the Put Call Ratio (PCR) can be used to improve investment performance. Considering that the Swiss Market is my home market, I decided to use raw data obtained from the SIX Swiss Exchange. The data is approx. 8GB and included over 2300 files with transactions from 2012 to 2021.
Below from left to right are the years 2012, 2020 and Q1 2021 for comparison. The middle chart is always the PCR, the top chart is the daily percentage change in the Swiss Market Index (SMI) as calculated from data obtained via Yahoo Finance, as is the the bottom chart showing the actual SMI level.
What can be seen from the data: My PCR, as calculated by a proprietary algorithm I developed in Python, will fluctuate between 0.05 and 0.20 in low volatility scenarios (2012 and 2021) but become much more volatile in a strong correction as was seen in Q1-Q2 turn in 2020. In such a volatile scenario as seen in 2020 the PCR will tripple compared to the non-stress scenario. The PCR will approach 0.5 in a medium-stress day.
While searching for meaningful practical information to explain the PCR, I did not find many graphs like the ones above, which show in a quick and simple way, how the PCR ratio develops during different scenarios.
What is also somewhat unique: I have 9 years of data that can be easily compared, as I used the same technique to calculate the PCR.
More about the Put Call Ratio (PCR) can be read here. (Systematic Individual Investor Blog Website)
On Charles Schwab website, the Put Call Ratio is one of several Market Strength indicators. The others being: Adaptive Relative Strength Index, Money Flow, Money Flow Percent and Relative Strengh Index.
Shows the number of puts divided by the number of calls based on open interest for individual stocks or indices. The ratio is often used as a contrary market indicator, which means that a high ratio may be a bullish indicator while a low ratio is often interpreted as a bearish indicator.
Questions or feedback?
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