Put-Call Ratio (PCR) is one of the most widely used indicators in the derivatives market to gauge overall market sentiment and investor positioning. It compares the trading volume or open interest of put options to that of call options, providing insights into whether traders are leaning more toward bearish or bullish expectations.

The Put-Call Ratio is calculated using the formula: PCR = Put Volume / Call Volume. A PCR value above 1 typically suggests that more puts are being traded, indicating a bearish outlook as investors may be hedging against potential declines. Conversely, a PCR below 1 reflects higher call activity, signaling a bullish sentiment where traders expect prices to rise. However, these interpretations can vary based on market conditions and should not be viewed in isolation.

Traders and analysts use the PCR as a contrarian indicator. For instance, when the ratio rises sharply, it might indicate excessive pessimism, hinting that markets could be near a bottom. Similarly, an extremely low ratio could reflect over-optimism, suggesting a potential correction. Therefore, understanding the context ó such as whether the market is in an uptrend or downtrend ó is essential before making decisions based on PCR levels.

It is also important to note that PCR can be calculated using option volumes or open interest. Volume-based PCR reflects short-term trader activity, while open-interest-based PCR provides a longer-term view of market sentiment. Investors and traders often monitor the Nifty or Bank Nifty PCR to assess broader market trends.

Overall, the Put-Call Ratio serves as a valuable sentiment tool for informed decision-making, but it should be used alongside other technical and fundamental analyses rather than as a standalone trading signal.