The Put Call Ratio (PCR) is one of the most common indicators in the derivatives market, especially when it comes to trading options. Traders use it to get a sense of how the market as a whole feels and to guess whether the market is bullish, bearish, or neutral. To find PCR, you compare the total open interest of put options with the total open interest of call options.
In short, PCR shows how many traders are betting that the market will go down (puts) or up (calls). Because of this, people see PCR as a measure of mood rather than price. It helps traders figure out what most people in the market are expecting.
What is Put Call Ratio?
Put Call Ratio is calculated using the following formula:
PCR = Put Open Interest ÷ Call Open Interest
A high PCR value means that there are more put buyers than call buyers. If PCR is low, it means that more people are buying calls than puts.
Importance of PCR in Trading
PCR is a very helpful tool for figuring out how people feel about the market. When PCR is high, it means that traders are either bearish or protecting themselves against the risk of losing money. When PCR is low, it means that the market is bullish.
Traders can also use PCR to find market reversals. Very high or very low PCR values are often a sign that something has been bought or sold too much. Professional traders use PCR, price action, and other signals to make sure that trends are changing.
PCR Interpretation
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PCR below 0.7 – Market is bullish
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PCR between 0.7 and 1.0 – Market is neutral
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PCR above 1.0 – Market is bearish
But you should never use PCR by itself. It works best when used with support and resistance levels, option chain analysis, and technical indicators.
PCR and Support–Resistance
PCR helps find important levels of support and resistance. High put open interest at a certain strike price means there is strong support, and high call open interest means there is strong resistance. Traders can expect breakouts or reversals by keeping an eye on changes in PCR near these levels.
PCR in Index vs Stock Options
Because of high liquidity, PCR is often used in index options like NIFTY and BANK NIFTY. You can also use stock-specific PCR, but you should always check the volume and liquidity to make sure you don't get false signals.
Advantages of Using PCR
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Easy to calculate and understand
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Helps identify market sentiment
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Useful for intraday and positional trading
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Helps in spotting trend reversals
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Works well with option chain analysis
Limitations of PCR
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PCR can give false signals in strong trending markets
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Should not be used alone
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Needs confirmation from price action and volume
Conclusion
The Put Call Ratio (PCR) is a strong and easy-to-use tool for options traders. It gives you a good idea of how traders think and where they are in the market. When used correctly with option chain data, technical analysis, and risk management, PCR can make trading decisions and consistency much better. For derivatives traders, knowing what PCR is is important for long-term success.
