Put Call Ratio Explained
The Put Call Ratio is the number of Put Options traded in a period divided by the number of Call Options traded in a period. It is a popular tool to help investors gauge the overall sentiment of the market. Usually the trading volume is used to compute the Put-Call Ratio, several traders also use the open interest data also for calculating the PCR.
Put Call Ratio Formula
To calculate PCR, one needs to divide the total open interest – OI of Puts by the total open interest – OI of the Calls. The calculated value is usually around 1.
Put Call Ratio Calculation = Traded Volume of Puts / Traded Volume of Calls
Put Call Ratio Calculation = Open Interest of Puts / Open Interest of Calls
The total open interest of both Calls and Puts for 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 a common investor who wants to refer to put call ratio live can do so readily from the NSE website from the following link – https://www.nseindia.com/products/content/derivatives/equities/homepage_fo.htm.
Put call ratio Analysis and Interpretation
If the PCR value 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 PCR value 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 values between 0.9 and 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 value of 1.4 may indicate extreme bearishness but for a stock like Reliance a value of 1.2 may not be enough to indicate the same. To conclude, the Index options PCR and Stock Options PCR should be evaluated independently.
PCR 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. There is no magic number that indicates that the market has created a bottom or a top, but generally traders will anticipate this by looking for spikes in the 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.