Put Call Ratio
Note* Volume and OI Figures are in Thousands
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Put/Call ratio (PCR) is a popular derivative indicator, specifically designed to help traders gauge the overall sentiment (mood) of the market. The ratio is calculated either on the basis of options trading volumes or on the basis of the open interest for a particular period. If the ratio is more than 1, it means that more puts have been traded during the day and if it is less than 1, it means more calls have been traded. The PCR can be calculated for the options segment as a whole, which includes individual stocks as well as indices.
Let’s see how PCR analysis can be interpreted taking option sellers into consideration who are the major players in the market as compared to the retail public who are usually on the buying side of the trade.
|Put / Call Ratio||Interpretation|
|If put-call ratio increases as minor dips getting bought in during an up trending market||Bullish Indication. It means the put writers are aggressively writing at dips expecting the uptrend to continue|
|If put-call ratio decreases while markets testing the resistance levels||Bearish Indication. It means call writers are building fresh positions, expecting a limited upside or a correction in the market.|
|If put-call ratio decreases during down trending market||Bearish indication. It means option writers are aggressively selling the call option strikes.|
Put/Call ratio is an important tool used by traders to gauge the overall sentiment of the market. Put/call ratio help traders decide the price movement of an underlying security and guides them to place directional bets on the stocks. Being a contrarian indicator, it helps traders not to get trapped with Herd Mentality. As the ratio is calculated both in terms of open interest and volume, the entire trading behaviour of market participants can be analysed using the Put/call ratio.
Put/Call ratio is a derivative indicator, it looks at option build-up, helping trader gauge whether a recent rise or fall in the markets is excessive and if the time is correct to make a contrarian call. It’s an indicator that’s best made use of during market extremes, traders try to identify periods where a reversal could occur in the markets.
No such conclusions can not be drawn, interpretation depends on the market situation and historical PCR data of the Index or stock in order to take a contrarian bet
There is no fixed number, historical data needs to be compared i.e. one month or 3-month averages. PCR, like rest of the technical and derivative Indicators should be used in conjunction with the rest of the indicators and should be interpreted according to the current market scenario.
PCR as a Contrarian Indicator
|Put / Call Ratio||Interpretation|
|If put-call ratio is increasing during correction in up-trending market and Implied volatility is falling||Bullish Indication. It means the put writers are aggressively writing at dips.|
|If put-call ratio is steadily rising during the day along with Nifty spot.||Bullish Indication.|
|If put-call ratio is increasing with sharp rise in Implied volatility while Nifty spot is near resistance level.||Bearish Indication.|
|If put-call ratio decreases during down trending market||This is a very bearish indication. It means call writers are aggressively writing at every rise or put writers are building bearish positions.|
The reliability of the of the indicator is quite high since it is based on the outstanding position of the traders in the market. But, when you use the indicator and how you interpret it is most important factor.