What is Put call Ratio in stock market and how to interpret it

what is put call ratio - jaanoaurseekho.com

To be a successful trader , we should understand short term sentiment of the market. It is important to predict the market correctly on top and bottom out of the market to book profits. Today we will learn how to predict top and bottom out of the market by using the Put/Call Ratio indicator. The ratio is calculated either on the basis of options trading volumes or on the basis of the open interest for a particular period. Usually we calculate it based on Total number of Put options  in Market divided by total no of call options in market .

Also Learn – What is open interest in futures and options

Put/Call ratio = Put open interest / Call open interest

In Put/Call ratio indicator, If the ratio is more than 1, it means that more puts have been added in markets and if it is less than 1, it means more calls have been added. If it is equal to 1, then the put open interest is equal to call open interest. 

A put call ratio of 1 means that markets are neither bullish nor bearish . Usually such markets are wait and watch market  as stocks and indexes usually remain sideways in such market.

A put call ratio more than 1.2 means there are more number of puts in system that calls. This means that people expect bearishness in markets. However , on contrary note , extremely high PCR (like 2+ ) means markets are oversold and  call writers are taking the market for granted expecting it to not move up which could create a short squeeze. Usually when see high PCR and markets are at support levels, we can assume markets will go up . But when high PCR ratio occurs at resistance , it means people are getting overbearish and fall may occur.

Similarly , a PCR < .7 indicates that markets have high number of call options open interest than put options. It means people are expecting markets to move up. A very  low PCR when markets are at resistance level indicates call writers may get trapped if market moves up .

So we have to take a look at PCR from both buyers and sellers perspective to have exact idea on markets sentiments.