No, and for many reasons. Here are a few:
First, and most importantly, “open interest” does not measure the number of options that customers (i.e. non market-makers) are long options. Open interest will rise even if customers are mostly selling options. Options open interest is simply a count of all open options positions, with one party long and one party short. Market makers will take the “other side” of trades that come in and they will immediately hedge the risk, but which side did they take? Customers may have initiated a short options position OR a long options position.
Example:
If a trader sells 10,000 calls, call open interest just went up by 10,000. But is that bullish? We can’t know from open interest alone whether a trader bought or sold.
Next, large traders are not necessarily (or usually) just buying calls when they are bullish and buying puts when they are bearish. They might use spreads. And, it’s important to understand a call spread can be bullish OR bearish, and a put spread can also be bullish or bearish
Example:
Trader BUYS 10,000 50 strike calls and sells 10,000 60 strike calls. Call open interest goes up 20,000. Taken on its own, this position is BULLISH.
Trader SELLS 10,000 60 strike calls BUYS 10,000 50 strike calls. Call open interest also just want up 20,000. Taken on its own, this position is BEARISH.
In both cases, bullish and bearish, call open interest went up by 20,000. But we have no idea whether the sentiment of customers is bullish or bearish just by looking at open interest, which is used to determine put/call ratio.
So, logically, we can’t read “market sentiment” just by looking at open interest of puts and calls (i.e. put/call ratio).
However, we can learn about market sentiment by look for abnormalities in options “volatility skew”, which shows the relative cost of OTM puts vs. OTM calls, for each upcoming expiration. This can be very useful, because unusually high or low premium for calls or puts (or both) indicates there is a sentiment in the marketplace that is powerful enough to affect the options market. Of course this assumes there is enough liquidity in the market being analyzed.
I’m not entirely sure where the idea of using “put/call ratio” to measure market sentiment came from, but considering the idea logically should reveal that it doesn’t hold much water. Instead, it seems to be based on a naive understanding of the options market.
