Put Call Ratio: The put-call ratio (PCR) is an indicator used by traders and investors to gauge the outlook and direction of the market. The ratio uses the Open Interest of Puts and calls over a determined time period on a market index to determine market sentiment. It can additionally be used for individual securities by looking at the OI of Puts and Calls on security or underlying. PCR can be calculated based upon OI as well as Volume. However, in this session, we have used the PCR of Open Interest (OI).
It is important to note that the PCR is interpreted differently depending on the trader’s or investor’s trading or investment style. For example, we observed that there are two types of participants in the market; A) a contrarian trader or investor who may consider a high PCR as a bullish signal while a low PCR as a bearish signal and B) a momentum trader or investor who may consider a high PCR as a bearish signal while a low PCR as a bullish signal. Therefore, the PCR interpretation depends on the style of market participant, and, as such, there is no one correct way to interpret the ratio.
Combining PCR with Implied volatility (IV).
Another smart way of interpreting from the Put-Call Ratio is by combining it with Implied Volatility (IV). Remember, IV is the volatility that is implied in the price of Option Premium and it reflects the risk perception in the market based upon circumstances and perception of the market participants.
For Open Interest and Option Chain Interest please refer to our Part 1 and Part 2 Video
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