Derivatives

PCR: This ratio will help gauge the sentiment of options market

Bavadharini KS BL Research Bureau | Updated on April 03, 2021

Put-call ratio, also known as PCR, is used to gauge the sentiment of options market. A higher proportion of call options to put options indicates a bullish trend ahead and vice versa. This ratio is computed by factoring in trading volumes or open interest at a given period.

Considering the open interest, PCR is calculated by dividing the number of open interest in put option contracts by the number of open interest in call option contracts, at the same strike price (or for entire option chain) and expiry date. For instance, the open interest for Bank Nifty put was 24,028 and the same for call option was 26,111, both expiring on April 1, 2021 and the strike price for both is ₹33,500. The PCR works out to be 0.92 (24,028/26,111). Generally, if PCR is less than 1, it indicates that investors are buying more call options than put options. It also means investors are expecting a bullish trend going ahead. If PCR is greater than 1, it means investors expect a bearish trend.

Similarly, PCR can be calculated using trading volumes i.e. put options trading volume divided by call options trading volume. If this is greater than 1, then it indicates put volume has exceeded the call volume and is a bearish sentiment. Vice versa, if PCR is less than 1. PCR not only helps in determining market sentiment but also helps traders to understand the price movement better. While PCR has its advantages, it is not the only reliable tool to predict market movement and should be used in addition to others.

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Published on April 03, 2021
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