PCR - Put Call Ratio

 Put Call Ratio (PCR)

One of the important indicators from the derivatives trading data is Put Call Ratio. A Put option gives the owner the right but no obligations to sell a specified amount of security at a specified price (Strike Price) before the given date (Expiry Date). In contrast to put, Call Options given the buyer the right with no obligation to buy the specified security at the Strike Price before the Expiry Date.

This information can be calculated for both indexes as well as individual stocks from the Options Chain data available on any exchange's website. For example, the below screenshot is from NSE official website.

 

How to calculate Put Call Ratio

Put Call Ratio can be calculated using different methodologies. 

In terms of total trading volumes of call and put options

Open Interests At different Strike Prices

Cumulative Put Call Ratio calculated for each day with all the strike prices

StoxFactor provides the PCR data based on cumulative Open Interests for all the future and options stocks and Nifty and BankNifty indexes in its dashboard.

How to interpret Put Call Ratio

With an assumption that majority of the traders expect the market to go further upwards a balanced or neutral PCR is 0.7 (instead of 1). If an option buyer is expecting that the prices will increase further they will buy Call options and since larger portion of traders most often expect the prices to increase from the immediate price there will be more Call buyers.

PCR value less than 0.7 is considered as bullish signal as there are more calls being written compared to the number of put writings. While PCR higher than 0.7 signal bearish sentiments as the number of put options buyers are higher than number of call buyers. 

One should not simply look at the PCR number as such but also check the under lying cumulative Calls and Puts numbers to understand the real sentiments. It may be that PCR is lower but instead of increase in call writing it was due to slight decrease in put buying/writing. As bearish traders sit on the sidelines, the result by default is that there are more bullish traders in the market. It doesn't necessarily mean the market is bullish , but rather that bearish traders are in a wait-and-see mode. 

Analyzing PCR along with the price movement can give a better view of the market sentiments. In the following chart StoxFactor captures the trend in price and PCR for stocks and indexes.

 

Contrarian Indicator

Some traders consider PCR as contrarian indicator. When the PCR value is extremely high (overly bearish) extremely low (overly bullish), a contrarian investor will treat it as a signal that the market turn around is in sight and he will put his bets with a contrarian view.

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