Understanding Put Call Ratio

By | March 1, 2014

As the name suggests, it is the ratio of all the Puts/Calls traded every day. If the ratio is more than 1, it means that more puts have traded during the day and if it is less than 1 it means more calls traded during the day.

To trade based on PCR; you will first need to collect historic PCR to know the extreme ends it can reach. NSE shares this information on this link daily. Assume that this average range for PCR over the last 1 year is in between 0.7 and 1.3.

PCR is also a contrarian strategy which believes that option buyers will typically lose money. So a typical way to analyse PCR would be:

a.     If PCR is below 1, it would mean that more calls are being traded and since more calls are being traded by the retail traders (option buyers) this could mean that the markets might do the opposite which is go down. Lower than 1 the PCR is, higher the chances of the market coming down. Since you know that historically PCR has been in the range of 0.7 to 1.3, at 0.7 PCR the chances of the market coming down will be the highest.

b.   If PCR is above 1, it would mean that more puts are being traded and since more puts are being traded by the retail traders (option buyers) this could mean that markets might do the opposite which is go up.  Higher than 1 the PCR is, higher the chances of the market going up. Since historically PCR is in the range of 0.7 to 1.3, at 1.3 PCR the chances of market going up will be the highest./

8 thoughts on “Understanding Put Call Ratio

  1. Subair

    Sir
    Today all dayPCR was bellow 1 also pe primium increased but market very bullish any specific reason?

  2. Bramesh Post author

    Hello Zafer,

    You do not have trust on your trading system thats why you are afraid of SL. Your statement ” i have a winning strategy” but am afraid of SL are contradictory.

    Rgds,
    Bramesh

  3. Bramesh Post author

    Thanks Ameet Will write article on India VIX

    Rgds,
    Bramesh

  4. Ameet

    Sir
    Fantastic explanation on PCR…. can you also explain about India Vix also. How to read in to India Vix?

  5. vivek

    d/sir

    pl tell me about delta

    how to use delta for treading?

    how it is calculated?

  6. Zafer

    Hi Brahmesh,
    Can u tell me how a stop loss works. I am too afraid of putting a stop loss thinking what if the shadow of any next candle with touch my stoploss and after taking all my capital again it will move to regular pertaining trend… please help me.
    This is my lesson of trading learning career…. please help me. I never had any guru because of lack of money but i have a winning strategy back tested several time by me but the stop loss fear is too strong in my mind and thus sometimes i loose larger than my previous profits 🙁 🙁

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