Latest HKFE Educational Article Scrutinises Put/Call Volume Ratio

The Hong Kong Futures Exchange (HKFE) published an educational article today (September 28) that examines the put/call volume ratio and warns that investors should exercise caution when using the ratio as a trading tool. The article, "Put/Call Volume Ratio in Perspective," was written by Dr. Kin Lam, Head, Department of Finance and Decision Sciences at Hong Kong Baptist University and Kevin Cheng, the HKFE's Head of Economic Research. After a brief introduction, the authors explain the put/call volume ratio is defined as put options volume divided by call options volume. They also point out that a high volume ratio is often seen as a sign of bearish market sentiment while a low ratio is often interpreted a sign of bullish sentiment. The authors then explain their study of the relationship between the put/call volume ratio for HSI Options and the direction of the HSI Futures market (spot-month) between January 1994 and August 1999, and they discuss the effectiveness of the ratio as a contrarian market indicator during the period. They say their results show the correlation between daily percentage changes in HSI Futures prices and the put/call volume ratio for HSI Options is low, which means the potential for using the ratio to predict market direction is limited. The authors add that their studies have also shown the put/call volume ratio is not a very good contrarian market indicator. Today's article is the fifth in a series of HKFE educational articles aimed at enhancing public understanding of the futures markets and the important role they play in Hong Kong. It can be found on the Exchange's web site: www.hkfe.com, under the News Centre's Special Reports section.