The Aisapaisa.com Angle

The Put Call Ratio (PCR) is simply the ratio of the trading volumes of put options on a particular underlying to the number of call options. This is a valuable indicator of market sentiment, for instance – a high PCR would indicate that the market is bearish since traders use put options to fix a sell price for their securities when they anticipate a fall in price thus a rise in put volumes is usually an indicator of the bearish mood in the market and vice versa. Although, it is worth noting that options traders are affected by sentiments too and are hence often go wrong, in fact data suggests that a high put call ratio usually precedes a rising market and a low ratio is followed by falling prices and this is why the PCR is more commonly employed as a tool by contrarian investors.

As a retail investor (contrarian or otherwise) it is worthwhile to observe spikes in the PCR as they precede major market movements.

This ratio is usually displayed in two formats – in terms of total traded quantity and open interest.

In the Indian context PCR as a tool is valid only for index options, given their high liquidity and not for most stock options on account of low trading volumes.

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