Advantages and Disadvantages of Using the Sell Call Rate
In this article, we’ll review some of the main advantages and disadvantages of using the sales call ratio to help anticipate market turns and trends.
Let’s start with the professionals.
The main point in using the put call ratio is that it allows investors to quantify and chart market sentiment, which many investors consider the main catalyst for the market.
A second plus point is that the option data used to calculate the ratio is easy to find and available to anyone with an Internet connection.
The third fulcrum is that because the historical data is quite abundant, the ratio can be easily plotted using most major trading platforms or charting packages.
The fourth point in support of the call option relationship is that it is an easy concept to understand even for the novice trader or investor.
And last (but not necessarily least) the fifth fulcrum is that it is a counter indicator and can help investors anticipate market movements ahead of the crowd. Other indicators are based on data that will make investors “follow” the herd.
And now, to balance, the cons.
The main point against using the put call ratio is also one of the strengths described above – it’s simple. Because the ratio is a simple calculation, it does not always describe the important nuances of market sentiment.
The second point against is that most people calculate the ratio using the volume of options, which does not take into account that most investors make decisions on the dollar amounts of the investors and not on the number of contracts. . A dollar-weighted ratio can solve this problem.
The third point against is that the ratio should be used in conjunction with other indicators and not as a separate signal generator.
A fourth negative point will be that not all share issues have available options. Therefore, it is impossible to calculate a call option index for many stocks.
And the fifth and final consideration against using the ratio is that even if a stock has options available, there must be enough volume activity for the ratio to be meaningful.
There you have it, the pros and cons of using the sales call rate to identify market opportunities.
In a final analysis, is it a good idea or a bad idea to track the sales call rate?
Like many market indicators, this relationship is good to follow, but with the caveat that it has its limitations and should be used in conjunction with other indicators.