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+S22 Part V: Index Options and Futures 
+Interpreting the Ratio. There are several philosophies as to how to inter­
+pret the ratio once it has been calculated. All philosophies are of the contrarian 
+variety, so the general comments made earlier that high ratios are bullish and 
+low ratios are bearish still hold true. However, quantifying just what is "high" 
+and what is "low" leaves room for interpretation. 
+One school believes that absolute ratios should be used. An example might be: 
+"if the 10-day moving average of the equity put-call ratio is over 0.60, that is a buy 
+signal." Unfortunately, applying absolute figures to any of the ratios can be counter­
+productive at times. If the market is in the grip of a prolonged bearish move, more 
+and more puts will continue to be purchased, sending the ratio quite high before it 
+can reverse and start coming back to normal levels. Therefore, it is better to look for 
+the ratios to make a high or a low before calling a buy or sell signal. This is a more 
+dynamic interpretation; it allows for buy and sell signals to come at different absolute 
+levels of the put-call ratio. 
+Figure 29-1 shows the 50-day equity put-call ratio going back several years (the 
+daily figures for the previous 50 trading days are averaged to produce the number 
+plotted on the chart each day). One can see that at certain times, the put-call ratio 
+reached extreme heights before finally generating a buy signal. Attempting to call a 
+buy on the market at an absolute level would have been an error because the entry 
+point would have come too early. Notice that the readings in late 1990- as the mar­
+ket bottomed in advance of Operation Desert Storm - were actually higher on an 
+absolute basis than those made after the stock market crash in 1987. Similar obser­
+vations can be made for sell signals after the ratio has reached low levels: don't antic­
+ipate - wait for the ratio to bottom out and tum up before declaring a sell signal or 
+to roll over and turn down before declaring a buy signal. 
+The index put-call ratio is shown in Figure 29-2. It tells a similar story to the 
+equity ratio, although there are certainly differences - beyond the obvious one that 
+the ratios have different absolute values. Note that this ratio averages about 1.00 
+while the equity ratio averaged about 0.50. 
+At times, index put buying becomes extensive even as the market climbs. This 
+does not generally happen with equity options. It seems that institutional money 
+managers, who are long stocks, are afraid that they will lose their profits after a quick 
+stock market advance. However, rather than sell their stocks, they buy puts (possibly 
+overpaying for them). Thus, they are really bullish (they own stocks), but they are 
+buying puts as a hedge. 
+This is a difficult situation for the contrarian. What is the institutional manag­
+er's true bias? Is he bullish because he still owns stocks or is he bearish because he 
+is buying puts? This is the bane of contrary analysis - attempting to accurately inter­
+pret the data that is being received. Figure 29-2 shows that the index put-call ratio