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Forex Options Strategies:
Put/Call Ratio of Forex Options and
How to Use It in the Spot Market

 
     
  On this page you will learn about one of the most effective tools you can use when developing your own forex options strategies: the Put/Call Ratio of Forex Options and How to Use It in the Spot Market

 

 
     
 
 
     
 
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Put/Call Ratio of Forex Options and How to Use It in the Spot Market

Although there are many traders who focus their careers on options trading exclusively, you don't need to trade this market to benefit from the data generated by it. Remember, to learn forex, you need to understand how the various financial markets work. And understanding the options market and the various factors that drive it can be very beneficial to retail traders of spot forex.

 

Before going further, let's remember that a call option is a contract that grants the owner the right to buy an underlying asset for a specific price, and conversely, a put option grants the owner the right to sell the underlying at a predetermined price point. For our purposes, it's important to understand that the buyer of a put option expresses the opinion that the underlying asset will depreciate, while the buyer of the call option believes that the price of the asset will rise.

Among the many tools used by traders for analyzing the relationship of the options market with the spot market, the put/call ratio of forex options is one of the more important. This data states the ratio of put options to call options and by evaluating it, traders aim to identify market extremes which they then use as trade triggers. Since the buyer of puts is bearish and the buyer of calls is bullish on the underlying asset, the put/call ratio tells us how bearish or bullish the market is overall. We all know that extreme bullishness or bearishness is associated with bubbles. Consequently, we can say that an extreme value of this ratio in the context of historical data is a sign that the market is reaching a level of euphoria or panic that is unsustainable in the longer term. If that is the case, it is time to enter a countertrend order with the goal of realizing profits when the eventual correction occurs.

As with any strategy, there are some caveats about using the put/call ratio. The extremes identified by this ratio are by nature arbitrary and the market may become even more irrational without pausing for a breath, which may be deleterious for a countertrend position. The perils of attaching too much importance to historic data is obvious; we should be careful in reminding ourselves that there is no guarantee that history will repeat itself. And in some cases, options positioning may not reflect spot positioning accurately, which reduces the predictive value of the put/call ratio.


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