what is Put/Call Ratio (PCR) in Stock Market

 The Put/Call Ratio is a measurement that compares the volume of put options traded to the volume of call options traded. It is used to assess whether the market sentiment is leaning towards bearishness or bullishness.

Calculation

Put/Call Ratio (PCR)=Number of traded put optionsNumber of traded call options\text{Put/Call Ratio (PCR)} = \frac{\text{Number of traded put options}}{\text{Number of traded call options}}

Interpretation

  • PCR > 1: Indicates that more puts are being traded than calls. This is typically seen as a bearish sentiment because traders are buying more puts, which are options that profit from a decline in the underlying asset.
  • PCR < 1: Indicates that more calls are being traded than puts. This is typically seen as a bullish sentiment because traders are buying more calls, which are options that profit from a rise in the underlying asset.
  • PCR = 1: Suggests that the market sentiment is neutral, with an equal number of puts and calls being traded.

Uses of PCR

  1. Market Sentiment: PCR is widely used to gauge the mood of the market. A high PCR indicates bearish sentiment, while a low PCR suggests bullish sentiment.
  2. Contrarian Indicator: Some traders use the PCR as a contrarian indicator. For instance, an extremely high PCR might indicate excessive bearishness, potentially signaling a market bottom and an opportunity to buy. Conversely, an extremely low PCR might indicate excessive bullishness, potentially signaling a market top and an opportunity to sell.
  3. Trend Confirmation: PCR can be used in conjunction with other indicators to confirm market trends. For example, if a bullish trend is accompanied by a low PCR, it may strengthen the case for the continuation of the uptrend.

Types of Put/Call Ratios

  1. Equity PCR: Measures the ratio for individual stocks.
  2. Index PCR: Measures the ratio for indices.
  3. Total PCR: Measures the ratio for the entire market, including all stocks and indices.

Example of PCR Calculation

Suppose in one trading day, there are 10,000 put options and 5,000 call options traded for a particular stock. The PCR would be: PCR=10,000 puts5,000 calls=2\text{PCR} = \frac{10,000 \, \text{puts}}{5,000 \, \text{calls}} = 2

This PCR value of 2 suggests that twice as many puts were traded as calls, indicating bearish sentiment for that stock.

Practical Applications of PCR

  • Daily PCR: Traders often look at the daily PCR to get a snapshot of market sentiment.
  • Moving Average PCR: To smooth out daily fluctuations, traders sometimes use a moving average of the PCR over a certain period (e.g., 10-day or 20-day moving average) to identify longer-term sentiment trends.
  • Volume PCR vs. Open Interest PCR: The PCR can be calculated using either the trading volume of options or the open interest. Volume PCR gives insight into short-term sentiment, while Open Interest PCR provides a view of longer-term sentiment.