Understanding Put Call ratio to analyze the Market Trend
Put call ratio is a very significant indicator to understand the direction of the market in near future. PCR measures the ratio of the put open interest on a given day to the call option open interest on the same day.
Thus PCR (OI) = Put open interest on given day / Call open interest on given day. The calculation of PCR for volumes and for open interest is quite simple. Remember, PCR Calculations are also done for a specific strike. Let us look at PCR of volumes first.
Assume that the put volumes in the Nifty 11200 strike is 89,000 contracts and the call volumes in the same contract for the same expiry is 1,30,000 contracts. In that case,
PCR (Vol) = 89,000 / 130,000 = 0.68
For more reliability PCR over a period of time should be calculated. ,. Let us also look at PCR of open interest…
Assume that the open interest of puts the Nifty 11200 strike is 40,00,000 contracts and the open interest of calls for the same contract and expiry is 51,00,000 contracts. In that case,
PCR (OI) = 40,00,000 / 51,00,000 = 0.78
A higher PCR indicates a selling indication means a bearish trend is imminent. To make it more meaningful remember these rules
Let’s see the live example
If you see the Nifty level of 11400 of 27th August 2020 expiry. The calculations of PCR based on the above formula gives the value of 0.66 Put (OI) = 1671750 Call (OI) = 2530200
PCR= 1671750/2530200 =0.66
Remember the following rules to be more clear:
PCR of a particular strike below 0.60 signifies strong resistance.
PCR of a particular strike above 1.8 shows strong support.
PCR of all strikes in the range of 0.80 to 0.50 indicates all oversold market
PCR of all strikes in the range of 1.225 to 1.5 signifies an overbought situation.
If you practice a little bit and analyze the data from NSE site for different strike prices you will be able to figure out the trend and use the PCR to make money by trading on the basis very solid indicator.