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What is Put Call Ratio (PCR)?

What is Put Call Ratio (PCR)?

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Investors use a variety of financial indicators to assess market sentiment before investing their money. Put call ratio is one such financial technique that benefits investors in several ways.

To comprehend the applicability and importance of this financial assessment, one must first grasp its fundamentals. Here, we've gone over the details of what is pcr ratio, including the put call ratio calculation and other information.

Understanding Put Call Ratio Meaning

A put call ratio is a derivative indicator used by traders to determine the sentiment of the options market. It is calculated by factoring in open interest or options trading volume. PCR is a contrarian indicator that helps traders determine the extent of bullish or bearish influence in the market. It helps traders understand if recent market increases or decreases are excessive and decide whether to opt for a contrarian call. This investment strategy involves purchasing or selling investment units against market conditions to combat mispricing in the securities market.

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Table of Content

  1. Understanding Put Call Ratio Meaning
  2. How is the Put Call Ratio Calculated?
  3. Example of Put Call Ratio
  4. Importance of Put Call Ratio
  5. Limitations of Put Call Ratio

How is the Put Call Ratio Calculated?

To calculate the pcr in the share market, divide the open interest in a put contract on a specific day by the open call interest on the same day.

Based on Open Interests on a Specific Day.

The PCR is calculated by dividing open interest in a put contract on a certain day by open call interest on the same day.

PCR (OI): Put Open Interest / Call Open Interest 

Based on the volume of options trading.

The PCR is calculated by dividing the put trading volume by the call trading volume on a given day.

PCR (Volume): Put Trading Volume / Call Trading Volume

Put volume refers to the total number of put options initiated during a given time range. Call volume, on the other hand, represents the total number of calls made within a certain time.

Notably, the meaning of this ratio varies depending on the type of investment.

Example of Put Call Ratio

Ms. Amruta, an investor, intends to use the PCR ratio to assess the market attitude of a specific investment. The puts and calls initiated are listed below:

Type of OptionNumber Initiated
Puts1300
Calls1700

PCR is total put open interest divided by total call open interest. 

PCR Ratio = 1300/1700

                  = 0.7647 

Because the outcome is less than one, it suggests that investors prefer to buy call options over put options. It also indicates that investors expect a positive trend in the future.

Importance of Put Call Ratio

The pointers below show the relevance of PCR in brief:

  • It is a useful tool for determining current market mood.
  • PCR ratio helps traders comprehend the direction of price movement in underlying securities. As a result, they may place directional bets on orders with more ease.
  • It is essentially a contrarian signal, which allows traders to avoid the herd mentality while investing in a certain market.
  • This PCR ratio is important for analysing the overall trading behaviour of market players.  

Regardless, this derivative indication is not without its limitations. Investors must learn more about them to battle market attitudes properly. 

Limitations of Put Call Ratio

One of the most significant limitations of the PCR ratio is that it does not always capture the subtleties of market mood.

Other Limitations of this ratio include—

  • Many corporate stocks do not provide options. This makes it impossible to calculate the PCR for the majority of equities.
  • Even though it is a contrarian indication, investors should consider other important criteria before wagering on current market attitudes.
  • To achieve successful results, PCR must be used in conjunction with other strong markers.
  • Investors must understand how to correctly interpret the put-call ratio chart, as even little shifts may serve as an important signal of potential market volatility.

Conclusion

Put Call Ratio (PCR) serves as a valuable tool for investors and traders to gauge market sentiment and make informed decisions. While it provides insights into the bullish or bearish nature of the market, it's crucial to acknowledge its limitations and use it in conjunction with other indicators for comprehensive analysis. By understanding PCR and its calculations, investors can navigate the stock market with greater confidence. Stay updated with real-time PCR data and market trends using the BlinkX stock market app for enhanced trading strategies and investment decisions.

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FAQs on Put Call Ratio

A good Put Call Ratio typically indicates a balanced market sentiment, generally considered between 0.5 and 1.5.

If PCR is greater than 1, it suggests a bearish sentiment, indicating more put options are being bought than call options.


 

A Put Call Ratio of 0.5 implies a bullish sentiment, signifying more call options are being bought than put options.

A 2.5 Put Call Ratio indicates an extremely bearish sentiment, suggesting a higher volume of put options than call options.

No, the ideal range for PCR varies depending on market conditions. Generally, PCR between 0.5 and 1.5 suggests balanced sentiment, but it's relative to prevailing trends.

PCR fluctuates with market sentiment. In bullish markets, PCR tends to be lower, while in bearish markets, it's higher, reflecting investors' outlook.

PCR influences options pricing and trading strategies. High PCR may signal overbought conditions, leading to adjustments in options pricing and bearish trading strategies.