Contents
What is Put Call Ratio?
The put call ratio is one of the most popular method used by investors to understand whether the market is in an overbought zone or oversold zone. It means that whether the market will tend to go up or fall down. It is the most popular indicators of the direction of the market. The investors can calculate put call ratio of any shares or stock. Put Call Ratio is also known as fear and grid meter. It is a contrarian sentiment measure.
Lets understand what is call option and put option
A put option is a right to sell an asset at a predetermined price.
A call option is a right to buy an asset at a predetermined price.
If traders are buying more put option than call option, then it signals a rise in bearish market.
If traders are buying more call option than put option, then it signals that there may be a bull market in future.
Formula of Put Call Ratio
The put call ratio is calculated by dividing the number of traded put options (open interest) by the number of traded call options (open interest).
Take open interest of 3 months i.e. of current month, next month, following next month.
Example
if there is total number of put options (open interest) of 3 months= 48809550
And total call option (open interest) of 3 months = 39059725
Then put call ratio (open interest) = 48809550/39059725
=1.24
Since number of put options is more than call options, then it signals a bearish market sentiment.
Analysis / Objective
If PCR is 1 then market sentiment is neutral i.e. we can’t say that market will go up or down.
If PCR is less than 1 then it shows that traders are buying more call options than put options.
If PCR is less than 1, then there may be a bullish market in future i.e. market is in an oversold situation.
If Put call ratio is more than 1 and it is between 1.6 to 1.8, then market is in an overbought situation and there may be a bearish market. If PCR is higher than 1 then it shows that traders are buying more put options than call options.
Importance of Put Call Ratio
PCR helps the investors to understand the market sentiment at a certain point of time.
PCR helps to analyse the overall trading behaviour of the market investors.
PCR help the traders to decide the price movement of an underlying securities.
PCR is an indicator of how the market views recent events or earnings.
Thanks for reading this article. Hope you found it very insightful and eye opener.
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