Market sentiment tells us if traders are worried, confident, or uncertain. The put call ratio or PCR as it’s often called follows this mood using options data. It compares the activity in put options to the activity in call options. Market positioning is determined before traders make a decision on options trades.
PCR is useful because price alone may not tell you how participants are positioned. But the ratio should not be used as a direct buy or sell signal. It works well when read with price trends, volume, open interest, volatility and support or resistance levels.
What Is the Put-Call Ratio?
The put call ratio is obtained by dividing the put activity by the call activity:
PCR = Total Put Volume/Open Interest / Total Call Volume/Open Interest
Volume-based PCR tracks contracts traded in a specific time period. Open interest PCR is a measure of contracts that are still active. NSE option chains display volume and open interest for calls and puts. Traders may analyse either.
Say an index has 120,000 contracts of put open interest and 100,000 contracts of call open interest.
PCR = 120,000/100,000 = 1.20
This means put open interest is 1.2x the call open interest. It doesn’t prove the index is going to go up or down. You have the option to purchase or write an option and each has a different view.
What PCR Indicates for Trading Sentiment
A PCR below 1 indicates that call activity exceeds put activity. This could be bullish positioning, writing calls or a combination of both.
A PCR over 1 means there is more put activity than call activity. This could be caution, hedging, put writing or bearish positioning.
A sharp rise can indicate increased demand for protection or new put positions. Sharp drops can indicate increased call activity. But fixed labels can be wrong. One index’s normal ratio is another index’s odd ratio. Traders should compare this number against its recent range.
How to Use PCR, Step by Step
1. Choose the underlying asset
Pick a stock or index that has options that are heavily traded. Compare put and call data with the same expiry.
2. Select Volume or Open Interest
1 . Look at current trading activity . Use volume PCR. Use open-interest PCR to measure the market’s open interest positions.
3. Find the Ratio
Add the put volume or open interest for the strikes you are studying. Divide the total by the relevant call figure.
4. Follow the Trend”
Record PCR on a regular basis. One number doesn’t tell the full story. A rising or falling series can indicate a change in position.
5. PCR vs Price Comparison
Price and PCR are to be read together. For example, a rising index with rising put open interest may be a signal for put writing near support. An index falling and with rising put volume may be a sign of hedging or bearish demand. These cases need to be distinguished by changes in the option chain.
6. Review related signal
Reviewed implied volatility, traded volume, open-interest changes, strike concentrations and chart levels. These checks mitigate the risk of reading PCR in isolation.
Limits of the Indicator
PCR does not tell you whether an option was bought or sold. It also can move around expiry as traders close or roll positions. Large hedging can make the reading difficult. Strike selection is also important, since out-of-the-money contracts can add noise.
This is why traders should not use a single universal threshold. There is need for historical comparisons and market context.
PCR Analysis using Bajaj Broking
Bajaj Broking provides education on put call ratio, option indicators, call and put contracts. Its trading platform also allows you to access market and option-chain data. This allows traders to combine PCR with price, volume, open interest and strike level activity when looking at option trading setups. Check platform features, charges and data availability prior to use.
Conclusions
A basic sentiment measure is the put/call ratio, calculated from put and call activity. It can be a signal of shifts in caution, hedging and market positioning. Following the trend , comparing it with price and confirming it with open interest , volatility and chart levels can enable traders to do more with it . Analysis should be guided by PCR, not replace a defined risk plan.
