What You Can Know About The Market With The Put-Call Ratio

Image

Market emotion can be gauged using a derivative indicator known as the Put-Call Ratio (PCR). Both a "call option" and a "put option" provide buyers the right to buy or sell a specific asset at a specific price, respectively. On any given day, the open interest in both a put contract and a call contract is combined to calculate the PCR. PCR = Put Open Interest/ Call Open Interest With lowest brokerage for intraday trading and at Zebu, we are constantly trying to provide customers with the best stock trading platform to make your online stock trading journey easy. Interpretation: A rising Put-Call Ratio, also known as a PCR, indicates that put contracts have a bigger open interest than call contracts. Traders are either negative on the market or using put options to protect their holdings from potential losses. There is greater open interest in call contracts than put contracts if the Put-Call Ratio or PCR falls below 0.5. This is a sign that investors are bullish on the market as a whole. A Put-Call Ratio of 1 shows that there are as many people interested in purchasing put options as there are in purchasing call options. Considerations that should be taken into account Investors can use the put-call ratio to get a sense of market sentiment before a market shifts. Aside from this consideration, it's vital to examine demand for both numerator and denominator (puts and calls). The denominator of the ratio contains the number of call options. In other words, a decrease in the number of calls exchanged will raise the ratio's value. Reduced call purchases without an increase in puts can raise the ratio. This is significant. To put it another way, the ratio doesn't have to climb dramatically in order for it to do so. As more bullish traders remain on the sidelines, the market becomes more negative as a result. However, this does not necessarily mean that the market is bearish, but rather that the market's bullish traders are waiting for a future event, such as the impending elections or RBI meetings. A Sign of Unpredictability: In India, the Put-Call Ratio is a common Contrarian Indicator. The market is due for a trend reversal if the readings are excessively high or low. Market players are overly pessimistic, and the market trend is likely to turn around soon. Similarly, exceptionally low levels signal that market participants are overconfident, and the market could turn red shortly if this trend continues. Like we mentioned earlier with lowest brokerage for intraday trading and at Zebu, we are constantly trying to provide customers with the best stock trading platform to make your online stock trading journey easy.