Understanding the Put Call Ratio

The put-call ratio (PCR) is a key indicator in derivatives markets that compares traded put options to call options, helping gauge investor sentiment—bearish or bullish. This piece explores its meaning, formula, interpretation, use in indices like Nifty and Bank Nifty, plus limitations and practical insights.

The put-call ratio shows the volume of put options relative to call options traded over a period, indicating if market sentiment leans bearish or bullish.

Explanation of Put Options and Call Options

Before interpreting PCR, it is essential to understand the two types of options involved:

• Put options grant the right to sell an asset at a predetermined price before expiry, often used to protect against price falls.
  

• Call options grant the right to buy an asset at a set price before expiry, reflecting optimism about future price increases.

The put call ratio (PCR) is one of the most commonly used market sentiment indicators in the derivatives segment. It can be calculated using two different data points — trading volume and open interest. Each method offers a slightly different perspective on how traders are positioning themselves in the options market.

By Volume

When the put call ratio is calculated by volume, it measures the number of put option contracts traded compared to call option contracts within a specific time frame, usually during the trading day.

Formula:

• PCR (by volume) = Put Option Volume ÷ Call Option Volume

For example, if Nifty options record 120,000 put contracts and 100,000 call contracts in a trading session:
PCR = 120,000 ÷ 100,000 = 1.2

A higher PCR (based on volume) may indicate that more traders are buying puts, reflecting a cautious or bearish market sentiment in the short term.
A lower PCR suggests stronger interest in calls, which can be interpreted as bullish behaviour.

This calculation is often used by short-term traders to gauge intraday market mood, as trading volume reflects real-time participation and emotion-driven activity.

By Open Interest

The second method uses open interest, which refers to the total number of outstanding option contracts that have not yet been settled.

Formula:

• PCR (by open interest) = Put Option Open Interest ÷ Call Option Open Interest

A higher PCR (based on open interest) suggests that, overall, more puts are being held in the market than calls. This indicates a cautious or hedged stance among investors.
A lower PCR indicates higher call open interest, which may point towards optimism or bullish expectations.

This approach is often considered more reliable for assessing medium- to long-term sentiment since open interest changes gradually compared to trading volume.

To evaluate interpretation, it helps to know typical PCR ranges:

• 0.7 to 1.3 is considered a neutral zone in Indian markets.
  

• A value below 0.7 could indicate strong bullish sentiment.
  

• A value above 1.3 may reflect excessive bearish hedging.
  Values beyond this range should be interpreted with context based on market cycles or volatility.
  

The put call ratio is a valuable indicator of investor sentiment. It helps traders understand whether the market is leaning towards optimism (bullishness) or caution (bearishness). Interpreting PCR values accurately requires considering both the ratio’s level and its trend over time. A single day’s reading may not be as meaningful as the broader movement of the ratio across sessions.

High PCR (PCR > 1)

When the put call ratio exceeds 1, it means that put options outweigh call options in the market.

This generally reflects caution or fear among traders, as more participants hedge against potential declines.
In certain situations, an excessively high PCR may indicate overselling pressure, which could precede a market reversal if the sentiment is overly negative.

Low PCR (PCR < 1)

A PCR below 1 indicates that call options dominate, suggesting that traders are leaning towards bullish positions.

This often indicates that a greater number of traders are taking call positions, suggesting optimism about potential price movements.
However, very low values can also signal over-optimism or complacency, meaning the market may be vulnerable to corrections.

Neutral PCR (PCR ≈ 1)

A PCR around 1 suggests a balance between put and call options, indicating that market sentiment is neither strongly bullish nor bearish.

This level often occurs during periods of consolidation or sideways price movement.
Traders typically use a neutral PCR as a baseline, observing deviations over time to gauge shifts in sentiment.

PCR Indicator vs Other Metrics

The PCR is most effective when analysed alongside complementary indicators. It should not be viewed in isolation.

• Open Interest Trends: Help determine whether new positions are being built or old ones are being squared off.
  

• Volatility Indices (e.g., India VIX): Provide insights into the market’s fear or confidence levels.
  

• Index Price Movements: Confirm whether the PCR’s sentiment readings align with the actual price action.

By combining PCR data with these metrics, traders incorporate additional information related to market psychology and potential trend direction.

Comparison of Bull Call and Bull Put Spreads:

Risk–Reward Differences

• Bull Call Spread: Limited profit and loss, initiated with a debit.

• Bull Put Spread: Also limited risk and reward, initiated with a credit, but involves put options.

Suitability Based on Market Bias

• Bull Call Spread: Used when a modest price rise is expected.

• Bull Put Spread: Preferred when expecting the price to stay above a certain level.

Interpreting the put call ratio in the Indian context helps investors and traders assess the collective mood of market participants. The ratio is particularly significant for benchmark indices such as Nifty and Bank Nifty, which represent broader and sector-specific sentiments respectively.

Nifty Put Call Ratio

The Nifty Put Call Ratio (Nifty PCR) measures the balance between put and call options traded on the Nifty index. It acts as an important gauge of market expectations surrounding the Indian equity benchmark.

When Nifty PCR rises above its average range, it typically suggests increased caution among traders who may be buying puts as protection against potential declines. Conversely, a lower PCR may indicate that more call options are being held relative to puts, reflecting a tendency toward optimism in market sentiment.

Tracking Nifty PCR over time, rather than focusing on a single-day reading, provides deeper insight into how sentiment shifts ahead of key events such as earnings seasons, monetary policy reviews, or budget announcements.

PCR Ratio Bank Nifty

The Bank Nifty Put Call Ratio (Bank Nifty PCR) reflects the prevailing sentiment among traders focused on the financial and banking sector.

Because banks play a central role in the economy, fluctuations in Bank Nifty PCR are often linked to movements in interest rates, credit demand, and macroeconomic announcements.

A higher Bank Nifty PCR generally points to heightened caution or hedging activity in the sector, while a lower ratio may indicate optimism among traders expecting improved lending conditions or stronger earnings.

Accurate PCR data is readily available across multiple reliable platforms.

• NSE India: The National Stock Exchange publishes daily statistics for futures and options contracts, including put and call volumes and open interest. This data can be accessed under the “Option Chain” and “F&O Market Data” sections on the official website.
  

• Trading Platforms and Charting Tools: Leading trading terminals and financial analytics tools display real-time PCR readings, often alongside open interest, implied volatility, and volume trends.
  

• Market Analytics Portals: Several data platforms aggregate PCR values for Nifty and Bank Nifty, helping traders observe daily changes and compare historical averages.
  

Regularly monitoring this data allows traders to identify shifts in sentiment, correlate them with price trends, and assess whether current positioning appears overly optimistic or defensive.

While useful, PCR has drawbacks that every user should be aware of:

• It does not distinguish between hedging and speculative trading.

• One-sided option volumes (large blocks) can distort the ratio.

• PCR does not predict price direction—only sentiment bias.

• It can lag during highly volatile or expiry-week market conditions.

Knowing how to apply PCR thoughtfully can improve its usefulness:

• Use PCR alongside additional indicators for confirmation.

• Observe emerging trends rather than reacting to a single data point.

• Account for market environment, such as volatility or expiry events.

• Track both Nifty and Bank Nifty separately to understand index-specific sentiment.

The put-call ratio helps interpret market sentiment by analysing options activity. While not predictive alone, it offers useful context when combined with other indicators, aiding informed assessments for self-directed investors.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.