Put Call Ratio, briefly known as PCR, is a very important tool that helps users give crucial information about the market sentiment and helps predict potential price fluctuations. PCR is a ratio of the total number of put options traded to the number of call options traded. The Put Call Ratio provides insights about the market, which the traders can use differently to formulate strategies for gain. In this article, we will explore the Put Call Ratio and its features, benefits, interpretation, and calculation.
What is the Put Call Ratio?
Put Call Ratio (PCR) is a financial indicator designed to help the users on TalkOptions to gauge market sentiment by dividing OI of put options by the OI of call options during a specific trading day. On TalkOptions, this can be accessed under the ‘Derivative Updates’ section.
The Put Call Ratio table provides details of the stock by categorizing them into three options - indices, Script Name and Expiry. The users can identify them based on their types such as NIFTY, BANK NIFTY and FINNNIFTY. The website further provides details about Expiry Date, Call Open Interest, Put Open Interest and PCR.
Features of Put Call Ratio (PCR)
Check the list of features offered by the PCR on TalkOptions,
Market Sentiment: Using Put Call Ratio, the TalkOptions users can identify the market sentiment by offering comparison of the put options numbers to call options traded on specific stock or index.
Identify Risks: This ratio helps the users in identifying the potential risks in the market to avoid any financial loss.
Stock movement: Put Call Ratio allows the TalkOptions users to check if the stock was showing bearish or bullish sentiment. High PCR suggests that the market is going through a bearish statement and more numbers of traders are betting on the decline of the stocks. On the other hand, low PCR shows that the market is bullish where investors expect to see rise in the stock.
Benefits of Put Call Ratio (PCR)
Here is the list of benefits that the TalkOptions users get out of Put Call Ratio,
Indicates market trends: This ratio helps the traders identify different trends in the market and understand if the other traders are bullish or bearish about a stock.
Manage risks: In almost all types of stock market trades, there are some risks involved, and they could lead to potential losses. Using PCR, the traders can reduce the risk and prepare their strategies according to the movements.
Predict Volatile stocks: The Put Call Ratio can show the potential volatility in the stocks and help the traders identify the direction in which the stock would go, i.e., up or down.
Analysis and Strategy Building: Using this ratio, the traders can analyze the market and build robust strategies for executing trades.
Works as Contrarian Signal: PCR can act as a contrarian indicator. Trader use PCR along with technical indicators to know the potential market reversals.
How to calculate the PCR ratio
The calculation of PCR is very simple; check below its details:
First of all, gather the data on call volume and put volume for the selected underlying asset.
Then, use the formula below.
Put Call Ratio = Total put volume / Total call volume.
Let us consider an example.
Suppose the total number of Put options traded on a specific trading day is 2,00,000 contracts, and for the call options, it is 1,50,000.
In the above case, the PCR would be calculated as,
PCR = 200000/150000 = 1.33
Interpretation of PCR values:
If PCR is greater than 1, it suggests more put contracts are being traded than calls, indicating bearish sentiment.
If PCR is less than 1, it suggests more calls are being traded than puts, indicating bullish sentiment.
If PCR is equal to 1, it suggests an equal trading volume of puts and calls, suggesting a neutral market sentiment.
How to interpret Put Call Ratio on TalkOptions?
On the TalkOption website, traders can access a feature that filters the stocks as bullish or bearish based on their put-call ratio (PCR). On this page, the user can check the details such as the name of the stock, its expiration date, call option OI, put option OI, and their respective PCR values.
As we saw above when the PCR value is high, that is above 1, it shows a bearish market sentiment. In this case traders tends to buy more put options. On the other hand, a low PCR value that is below 1, shows a bullish market sentiment. In this case traders buy more of the call options.
On talkOptions website traders can select the Bearish tab on the website to check stocks that exhibit bearish sentiment based on the PCR. By selecting the prefered expiry date, they can filter the stocks based on tehir time value. The PCR ratio on the TalkOption website offers traders valuable insights into overall market sentiment. It further allows traders to detect potential price trend reversals, make informed option trading decisions, and modify their strategies if needed. The PCR helps traders stay updated with the market and identify trading opportunities aligned with the current market sentiment and their risk-bearing capacity.
Put Call Ratio or PCR is one of the most important ratios of the stock market that benefits the traders in many ways. It helps the traders in predicting the market trends by analyzing the stock and predicting the price fluctuations. This ratio helps in understanding market sentiment and gauge price fluctuations. The traders can use this ratio to build strategies that lead to maximum gain in options trading activity.