Market Timing Rule with Put/Call Ratio

    This market-timing strategy uses the put/call ratio as an indicator to predict future stock market return. In this strategy, stocks are supposed to be sold when the indicator falls below the predefinded threshold value, and vice versa. It also has “delay day” and “waiting day” settings.

    Much of the data used in tracking market sentiment is derived from the options market.  One of them is the put/call ratio, defined as the trading volume of puts (or number of puts outstanding) relative to the trading volume of calls (or number of calls outstanding). It is widely used by analysts to measure the sentiment in the options market. That is, when the put/call ratio is high (a high number of puts being traded relative to the number of call options being traded), the market is highly pessimistic and a turnaround with an increase in stock prices is expected. On the contrary, a low put/call ratio indicates that the market is overly optimistic and is expected to adjust downwards.

    So for the Put/Call ratio, rising above a certain threshold is considered to be a switch signal from holding cash to investing in S&P 500 Index, and vice versa. If the same switch signal persists for “delay days”, we switch the trading position. And in the succeeding “waiting days” we keep the position ignoring the new switch signals. The signals are examined every month.

    Threshold can be certain fix values or SMA (Simple moving average) of certain days. For the moment, Our database has Chicago Board Options Exchange (CBOE) daily exchange put-call ratios, include index exchange put-call ratio (CBOE-I), equity exchange put-call ratio (CBOE-E) and total exchange put-call ratio (CBOE-T). 

Parameters used in the created portfolio:

Indicator: Put/Call ratio

 

Threshold: 0.7, 0.8, SMA 30days (default) , SMA 120days

Waiting days: 1 day, 5 days  (default)

Delay days: 1 day, 5 days (default)

 

BuySecurity: ^GSPC (default)

 

Put/Call ratio : CBOE-E (default, Chicago Board Options equity exchange put-call ratio) , CBOE-I(Chicago Board Options index exchange put-call ratio), CBOE-T(Chicago Board Options total exchange put-call ratio)

 

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