The put call ratio (PCR) is a well-known indicator used by investors and traders to measure the market sentiment. It is primarily derived from the options market and is calculated using either trading volume or open interest of put and call options.
By comparing the total volume or open interest of the put options with the total volume or open interest of the call options over a specific time period, helping traders to gauge whether market sentiment is leaning towards a bullish or bearish.
The put call ratio (PCR) can be calculated by using either trading volume or open interest. When PCR is calculated based on trading volume, it reflects short-term market sentiment, whereas PCR is calculated using open interest represents long-term or positional market sentiment.
The put call ratio (PCR) is widely used in index options like nifty and bank nifty to gauge broader market sentiment, whereas stock specific PCR helps in understanding bullish or bearish sentiment in individual stocks based on their options activity. Index PCR is generally considered more reliable as it reflects the collective behavior of a wide range of market participants, particularly institutional traders, making it a stronger indicator of overall market sentiment. Stock PCR, on the other hand, can sometimes be distorted due to lower liquidity or stock specific events; therefore, it should be used with extra caution.
PCR is calculated using the following formula
Formula,
| PCR = Total put volume or open interest / Total call volume or open interest |
Interpreting
PCR= 1:- When PCR is near to 1, it indicates neutral sentiment, it mean neither control of
bulls or bears on markets or stocks.
For example, Assume ABC Ltd traded at Rs. 2400
According to option chain data:-
- Total put open interest: 1000 contracts
- Total call open interest: 1000 contracts
| PCR = [ 1000 put open interest ] / [ 1000 call open interest ] = 1 |
PCR< 1:- When PCR is less than 1, it indicates bullish sentiment in the market because
investors and trader bought more call option contract than put option contract.
For example, ABC Ltd price Rs. 2400
Options chain data
| Sr. No. | Put OI | Strike Price | Call OI |
| 1 | 9800 | 2350 | 15200 |
| 2 | 8100 | 2375 | 12500 |
| 3 | 6500 | 2400 | 10200 |
| 4 | 5200 | 2425 | 8700 |
| 5 | 4300 | 2450 | 6500 |
| 33900 | 53100 |
PCR = (33900) / (53100) = 0.63
PCR < 1, it indicates traders are more bullish on ABC Ltd.
PCR> 1:- When PCR is greater than 1, it indicates bearish sentiment in the market because
investors and traders are bought more put options contract than call option contract.
For example, ABC Ltd trader at Rs. 2400
According option chain data:-
- Total put OI: 150000
- Total call OI: 100000
PCR= (150000) / (100 000) =1.5
PCR > 1, It indicates traders are more bearish on ABC Ltd.
Conclusion
The PCR is a sentiment indicator used by investors and traders to predict the price movement of stocks or the market. It is particularly used in the derivative market and calculated using NSE option chain data such as open interest or volume. It helps market participants predict whether the market or stocks are in a bullish or bearish movement.
The PCR gives valuable output but should not be used alone because it creates a little bit of confusion while trading as a beginner combining it with other technical and fundamental indicator increases its effectiveness.
In conclusion, PCR is a valuable indicator used to evaluate market sentiment, identify potential trend reversals, and manage risk. However, you can overcome its limitation by combining it with other indicators.
FAQ’S
Answer: Put call ratio (PCR) is a popular derivatives market indicator that measures the ratio of put options to call options, helping traders to analyze market sentiment, bullish or bearish trends, and potential market reversals.
Answer: Put call ratio (PCR) is calculated by dividing the total number of put options traded (or open interest) by the total number of call options traded, by helping traders to gauge overall market sentiment.
Answer: A high put call ratio (PCR) means traders are buying more put options than call options, which shows fear in the market and indicates that investors expect prices to fall.
Answer: A low put call ratio (PCR) means traders are buying more call options than put options, which shows a positive (bullish) view that the market may go up.
Answer: An ideal put call ratio (PCR) value is around 1, which means the market is balanced; below 1 shows bullish sentiment and above1 shows bearish sentiment, making it easy for traders to understand market mood.
Answer: Yes, put call ratio (PCR) is useful for intraday trading as it helps traders to understand short term market sentiment and option positioning.
Answer: The put call ratio (PCR) is important because it helps traders to understand whether the market is bullish or bearish, so they can make better and safer trading decisions.
Answer: Open interest based PCR is usually better than volume based PCR because it shows how many positions are actually open in the market, giving a clear picture of trader sentiment and market trend in a simple and reliable way.
Disclaimer
This article is for educational and informational purposes only and should not be considered financial, investment, trading, legal, or tax advice. Cryptocurrency, blockchain, stock markets, and other financial investments involve risks. Always conduct your own research and consult a qualified financial advisor before making any investment decisions.
