What is Put Call Ratio (PCR)?
The Put-Call Ratio measures open put option contracts in comparison to open call option contracts in the option chain.
- Calculation:
A. PCR based on Volume = Trade Volume of put options / Trade volume of call options
B. PCR based on Open Interest (OI) = OI of put options / OI of call options
For example, the total OI of call and put options on 1st Sept is 15,00,000 and 12,00,000 respectively.
Hence, PCR = 12,00,000 / 15,00,000 = 0.80
- Interpreting PCR:
PCR helps measure market sentiment. A PCR of 1 indicates that the number of call option buyers is equal to the number of put option buyers. This is never the case as there are usually more call buyers than put buyers. Hence, PCR is usually less than 1, at around 0.7 for stock options.
When the rato is close to or less than 0.50, it indicates bullish market sentiment as more call options are being purchased. Similarly, when the ratio is close to or greater than 1, it indicates bearish market sentiment as more put option contracts are being bought. This means that there is more betting against the underlying.
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