The Put-Call Ratio (PCR) is a sentiment indicator used by traders to gauge market direction by comparing the number of traded put options (bets on price falling) to call options (bets on price rising). A high PCR indicates bearish sentiment, while a low PCR suggests bullish sentiment.
- Purpose of PCR : PCR helps identify whether the market sentiment is bullish, bearish, or neutral. It is especially useful when the ratio reaches extreme levels, as it may signal a trend reversal. However, it should be combined with other tools for accurate decision-making.
- Components of PCR : The PCR helps identify the dominant bias of the market participants by observing how many are buying puts versus calls. By comparing the two, the PCR tells us whether fear (more puts) or greed (more calls) is dominating the market.
- Put Options: Traders buy put options when they expect the price of an asset to fall.
- Call Options: Traders buy call options when they expect the price of an asset to rise.
- Formula
The PCR can be calculated using Volume or Open Interest:
a) Volume-Based PCR = Volume of Put Options / Volume of Call Options
b) Open Interest-Based PCR = Open Interest of Call Options / Open Interest of Put OptionsVolume refers to the total number of contracts traded in a day, while open interest represents the total number of outstanding (unsettled) contracts.
- Interpretation of PCR
The value of the PCR gives us a clue about what traders expect:
| PCR Value | Interpretation | Market Sentiment |
| Less than 0.5 | Far more calls than puts | Strongly Bullish |
| Around 0.5–1.0 | Slightly more calls or balanced | Moderately Bullish or Neutral |
| Equal to 1.0 | Equal puts and calls | Neutral |
| More than 1.0 | More puts than calls | Bearish |
| Greater than 1.5 | Heavy put buying, possibly panic | Very Bearish or Oversold (contrarian bullish signal) |