InvestorQ : I hear a lot about the Put-Call Ratio. What is it and how to use it?
sarah Leo made post

I hear a lot about the Put-Call Ratio. What is it and how to use it?

Answer
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Arusha Ray answered.
2 years ago


Put call ratio (PCR) can be looked at in two ways. We can calculate the PCR of volumes which is the ratio of the volumes on the puts of a particular contract to the calls of that contract. PCR can also be looked in terms of PCR of Open Interest. Open interest measures all the open positions in options and indicates the bias of the market. As an analyst or a trader you can focus on the PCR (Volumes) and the PCR (OI). Let us see the detailed interpretation…

There is no range for PCR but normally the PCR hovers around the “1” mark. When the PCR goes well below the 1, then it is an indication that traders are buying a lot more call options than put options. That means relatively more traders are bullish on the stock or the index. On the other hand, if the PCR goes well above 1, then it is an indication that traders are buying a lot more put options than call options. It means more traders are bearish.

Interestingly, the actual interpretation is that PCR is used as a contrarian indicator. That is because retail investors are normally the buyers of options while better-informed institutions and proprietary desks are the sellers of options. Thus a rising PCR will be seen as a contrarian bullish signal as it indicates that fewer institutional traders are willing to sell calls. Similarly a falling PCR will be seen as a contrarian bearish signal as it indicates that fewer institutional traders are willing to sell puts.