Put Call Ratio (PCR) is a derivative ratio used by traders to gauge the overall mood of the market. Put call ratio can be defined as the total number of outstanding put options divided by the total number of outstanding call options In that same period.
Call options are usually bought when there is a bullish sentiment in the market. Whereas put options are bought when there is a bearish market sentiment. By studying the Put Call Ratio, investors can anticipate the overall sentiment of the market.
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Usually open interest is used to calculate the Put Call Ratio. But several traders also use volumes to calculate the Put Call Ratio.
Put Call Ratio Formula – How to Calculate the Put Call Ratio?
To calculate Put Call Ratio, you need to divide the total open interest (OI) of Puts by the total open interest of Calls. The calculated value usually ranges from 0.5 to 1.50.
Put Call Ratio Formula = Traded Volume of Puts / Traded Volume of Calls
OR
Put Call Ratio Formula = Open Interest of Puts / Open Interest of Calls
For example, if the total open interest of both Calls and Puts on 1st September is 10,00,000 and 8,00,000 respectively then,
Put Call Ratio = 8,00,000/10,00,000 = 0.8
How can one calculate the NSE Put Call Ratio in Real Time?
For common retail investors, put call ratio is readily available from the NSE website from the following link…
NIFTY Put Call Ratio Live from NSE India website
Put Call Ratio Analysis and Interpretation – How to Analyse Put Call Ratio?
If the Put Call Ratio is above 1, then it suggests that there are more puts being bought in the market compared to calls. This tends to show that there is bearish sentiment in the market. Usually, an extremely high number above 1 indicates that the market is oversold and at that point, there could be a reversal and one can expect the markets to go up.
If the Put Call Ratio is below 1, then it suggests that there are more calls being bought in the market compared to puts. This tends to show that there is bullish sentiment in the market. Usually, an extremely low number above 1 indicates that the market is overbought and at that point, there could be a reversal and one can expect the markets to go down.
For all Put Call Ratio values between 0.9 and 1.1, it can be said that the markets are neutral.
This is a general interpretation of PCR. The extreme PCR values for different indexes and stocks are different and it helps to plot daily PCR historically to identify these extreme values. For example, for Nifty, a Put Call Ratio of 1.4 may indicate extreme bearishness but for a stock like Reliance, a Put Call Ratio of 1.2 may not be enough to indicate the same. To conclude, the Index options Put Call Ratio and Stock Options Put Call Ratio should be evaluated independently.
Put Call Ratio as a Contrarian Indicator
The Put Call Ratio is generally used by traders as a contrarian indicator when the values reach relatively extreme levels. This means that many traders will consider a high Put Call ratio of say 1.4 a sign of a buying opportunity because they believe that the sentiment in the market is extremely bearish and that it will soon adjust, when those with short positions start looking for places to cover and market will eventually bottom out.
But Put Call Ratio is no magic number that indicates that the market has created a bottom or a top. However, generally traders will anticipate the market top or bottom by looking for spikes in the Put Call ratio or for when the ratio reaches levels that are outside of the normal trading range. The general trend of the NIFTY Put call ratio is such that NIFTY put call ratio seems to oscillate between 0.8 and 1.3 with 0.8 being the lower band and 1.3 being the upper band.
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