FRED GOODMAN'S KEY INDICATORS FOR INVESTMENT SUCCESS
Put/Call Bollinger Bandwidth
Friday, February 21, 2003
Fred Goodman
Here's a new way of getting our arms around the put/call ratio.

Some months ago I started charting the daily CBOE Put/Call Ratio with Bollinger Bands. A Bollinger Band, in this case, is calculated as two times the standard deviation of the 21-day moving average of the daily put/call ratio. I have charted the bands both above and below the daily value of the ratio. The theory I was studying is that when the daily value of the ratio exceeds the Bollinger Band, it is likely to reverse quickly. Since there is an exceptionally large ratio on the option expiration day, I have identified those special days with a dot because they are artificially big days and have little meaning.

Well, I have learned nothing from that chart. Next, I was curious about the distance between the upper and lower bands, as a measure of the volatility of the put/call ratio, so I added the result of subtracting the lower band from the upper band to the bottom of the chart. That is the brown line near the bottom with an arrow labeled "Bandwidth," pointing to it . In the next chart I plotted just the bandwidth, versus the S&P 500.

Daily CBOE Put/Call Ratio with Bollinger Bands Through Friday, February 14th

What I have discovered from studying this chart is that the bandwidth increases sharply, coincidentally with market inflection points. At both market tops and bottoms, the distance between the 21-day Bollinger Bands seems to increase sharply. It is pretty interesting, because the bands based on 21-day averages, so they are determined long before the market changes directions. What is even more interesting is that the bandwidth is sharply increasing right now! I have not added this to the regular 29 indicators, but I'm certain that we will be hearing more about it.

CBOE Put/Call Bandwidth Through Friday, February 14th

Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information.