Chart & Description courtesy of marketgauge.com
..."Options are one of the most popular investment vehicles for speculation and hedging. Extraordinarily biased volume or premium suggests excessive fear or greed. Market turns have often been preceded by concurrent extremes in the OEX put/call ratio, and option premiums of individual equities.
Calculation & Significant Levels
OEX Put/Call Five-Day Ratio:
The five-day average of the daily put/call ratio. Bullish is >1.4 and bearish is <.85. Formula: Five-day average of (OEX Put volume/OEX Call volume)
The one and five-day OEX volume ratios represent the bullish or bearish sentiment of the option players watching the market as a whole. Spikes in these two indicators often identify short-term overbought or oversold conditions in the market. Continued excess volume with a bias toward either puts or calls has historically been a good short-term contrary indicator.
The CBOE premium ratio reflects the sentiment of option traders of individual equities. Occasionally, the five-day average of the CBOE put/call premium will reach an extreme along with the OEX volume. When this has occurred it has served as a significant intermediate-term contrary indication. "...