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.

Calculation of PCR is straightforward and can be done using daily volume data:

Put–Call Ratio = Total Put Volume ÷ Total Call Volume

For example, if Nifty options traded 120,000 put contracts and 100,000 call contracts in a session:

PCR = 120,000 ÷ 100,000 = 1.2

Volume data is available for indices like Nifty and Bank Nifty via NSE’s official statistics, or through charting terminals.

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.
  

Knowing what influences PCR values is vital in applying it accurately:

• Low PCR (below 0.7) may suggest confidence in rising prices, but extreme lows could signal complacency.
  

• High PCR (above 1.3) often reflects fear, though high values may also suggest overselling pressure, potentially creating reversal opportunities.
  

• Observing PCR trends over time is more useful than single-day values for gauging sentiment shifts.
  

PCR Indicator vs Other Metrics

PCR works best paired with other indicators, such as:

• Open interest trends, indicating whether new positions are building.
  

• Volatility indices like India VIX, for assessing market mood.
  

• Index price action, to confirm whether sentiment aligns with trends.

Discover how this strategy compares with its counterpart:

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.
  

 

Applying PCR in Indian markets requires familiarity with local structures and data:

Nifty Put Call Ratio

Nifty PCR evaluates sentiment among traders focusing on Nifty index options. It fluctuates with broader economic expectations and market outlook.

PCR Ratio Bank Nifty

Bank Nifty PCR reflects trader sentiment specifically toward financial sector options. Elevated readings are common during interest rate cycles.

Where to Check PCR Data for Nifty and Bank Nifty

Data accessibility is important for effective analysis:

• NSE India offers daily statistics for futures and options on its official website.
  

• Most trading platforms display PCR values alongside open interest and volume.
  

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.
  

 

Examining a week of daily PCR values can help observe patterns:

The weekly trend from 1.20 to 1.17 suggests a gradual easing of bearish sentiment.

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.