The put/call ratio is a popular sentiment indicator based upon the trading volumes of put options compared to call options. The ratio attempts to gauge the prevailing level of bullishness or bearishness in the market.
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The buying and selling activity for puts and calls can be used to help gauge investor sentiment in the market. The put call ratio measures the relationship between the numbers of puts being bought versus calls being bought. This indicator refers to All CBOE (Chicago Board of Exchange) Options.
High put/call ratios are often indicative of excessive pessimism and thus of large amounts of money on being at the "sidelines." Conversely, low put/call ratios indicate a point at which there is so much optimism that very little money is left to push the stock or index higher.