Understanding the Put Call Ratio (PCR)
The Put Call Ratio (PCR) is a handy indicator that helps us grasp the general market sentiment. It calculates the ratio of traded Put options to Call options. A ratio exceeding 1 suggests a bearish market, while a ratio below 0.5 indicates a bullish trend. In the following sections, we’ll explore the concept behind the Put Call ratio and the steps to calculate it. You’ll also find an automated Excel sheet at the end, making PCR calculations for Nifty and BankNifty effortless.
Further Reading: Options Max Pain Calculator
The Science of Put Call Ratio
The Put Call ratio is a straightforward calculation based on options trading volume. When the volume of Put options surpasses Call options, it indicates a bearish market. This leads to a PCR greater than 1. Investors typically buy Put options when they anticipate a market decline. Conversely, a surge in Call options indicates bullish sentiment, resulting in a PCR below 1. In essence, the PCR is simple, logical, and a reliable signal for market reversals.
Calculating the PCR
The PCR calculation involves three simple steps for any option series:
Step 1: Add the total Open Interest of Put options for each strike price (a).
Step 2: Sum the Open Interest of Call options for each strike price (b).
Step 3: Divide a by b.
Deciphering the Put Call Ratio
Interpreting the PCR is straightforward:
- If the PCR is greater than 1, it signals extreme bearish sentiment. Contrarian traders can use this as a signal to go long because the market is considered oversold.
- A PCR value between 0.5 and 1 suggests a sideways trend. It’s best to avoid trading during this phase.
- If the PCR falls below 0.5, it indicates a bullish sentiment. Contrarian traders can consider short positions, as the market is seen as overbought.
The Put Call ratio is a trusted tool for contrarian traders as it accurately predicts market reversals.
PCR Excel Sheet
We’ve included an automated Excel sheet for PCR calculations for Nifty and Banknifty. You don’t need to input any data; it refreshes automatically every 5 minutes, retrieves the option series, and calculates the PCR. All you need is an internet connection to access the updated values.
Get the Excel sheet by clicking on the link below:
If you have any questions or need assistance, feel free to leave a comment below.