A Put call ratio is a Ratio, used by investors as well as traders to find out the sentiment of a Particular Stock or the overall Index. A put-call Ratio helps to understand whether the sentiment of the market is Bullish or Bearish. To calculate the PCR one has the Divide the total number of Open Interest of the Put OPtions by the total number of Call options. By this one can derive the PCR of the underlying asset.
Put Call Ratio-
Put Call Ratio tells us the ratio of how many Puts are traded (Bought & Sold) against the total number of Calls traded. A Put-Call ratio is used by traders as well as investors to interpret the market sentiments. The Put call ratio or the PCR is made up of 2 components-
- Put Option
- Call OPtion
Put option-
A Put option is a contract that gives its buyer the right to sell the underlying asset at a pre-determined price. Similarly, the seller of a Put option has the obligation to buy the underlying asset on the date of expiry at that pre-determined price.
A put option can be bought by paying a small token known as the Premium for the contract. There is no compulsion to hold the contract till the expiry date hence if the buyer wants to sell the contract, he can do so at the price prevailing in the market.
A Put option is bought by a trader anticipating that the underlying price of the asset to fall or decrease. Only then the buyer of the Put option will make a profit as the value of the Premium increases as the Underlying price decreases.
Call option-
A Call option is a contract that allows the buyer, the right to sell the underlying asset at a pre-determined price by the date of Expiry. Similarly, a seller of a Call option is obliged to buy the underlying security at the pre-determined price if held the contract until maturity.
Now that we know how the Call & Put options work, let’s see how to calculate Put call ratio
Calculating the Put-Call Ratio-
The PCR is calculated by dividing the total number of Put options by the total number of call options in the open interest of the particular Stock/Index.
To calculate the Put-Call ratio of any asset it is necessary to check the open interest. Open Interest or (OI) denotes the maximum number of open or unsquared contracts of that particular asset.
If any particular asset is not traded in Derivatives then the open interest cannot be found for that particular Stock or Index,
Let’s take the example of ICICI Bank therefore to calculate the Put-Call ratio, one would have to know the total Open Interest (OI)in the Call side as well the Put side.
If the total open Interest of the Call options are-12,000 contracts
Total Open Interest in the Put option- 1,09,00.
Hence in this case the Put-call will be- 10900/12000=0.908.
Rounding it the PCR turns out to be- 0.91.
Hence the PCR of ICICI Bank is 0.91 currently. This shows that the overall number of Call option buyers is greater than the Put option buyers when means the sentiment for this particular is Bullish. Put-Call Ratio is used to take a fresh position or exiting a previous position. If the PCR is under 1 then that denotes that a Long position can be taken in the particular asset whereas if the PCR is above 1.7 then the asset is considered to be in the Overbought zone and one should look at a Shorting opportunity with respect to the Technicals.