Posted by forex at 1:14 AM
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1. Review the definition of a put and a call. A call is the right, but not the obligation, to purchase a currency in the future at a predetermined price. A put is the right, but not the obligation, to sell a currency in the future at a predetermined price. Investors buy calls when they believe a currency is getting stronger and puts when they believe a currency is getting weaker.
2. Review the definition of open interest. Open interest is the number of open put or call contracts on a particular currency. Open interest is the amount of interest for either puts or calls in the market. More open interest in puts means the market sentiment is bearish and thinks the currency is going to be weaker in the future. More 'open interest' in calls means the market sentiment is bullish and thinks the currency is going to be stronger in the future.
3. Calculate the put/call ratio. Divide total amount of open interest in puts by the amount of open interest in calls. For example if there are 30,000 put options on EUR/USD and 15,000 call options, the put/call ratio is 2. This is indicative of a bearish market as there is more open interest in puts (options to sell) than calls (options to buy). A ratio over 1 is indicative of a bearish market and a ratio under 1 is indicative of a bullish market.
4. Go to CME Group to look up the open contracts for any given currency. Click on 'Settlements' and scroll to the far right of the screen. Here you will find the number of open contracts under 'Open Interest.' See Resources for a link to the EUR/USD chart.