It is very important that one understand the Put call ratio (PCR) as it can be used to make money in the stock market. However remember that trading in options is more suitable for high networth individuals and you can check our HNI trades here.
As the name suggests, it is the ratio of all the Puts/Calls traded every day and one just need to a little of mental arithmetic to arrive at the figures. It is worth mentioning here that 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.
One can benefit by seeing that PCR is also a contrarian strategy which believes that option buyers will typically lose money. So a typical way to analyse PCR would be:
As the name suggests, it is the ratio of all the Puts/Calls traded every day and one just need to a little of mental arithmetic to arrive at the figures. It is worth mentioning here that 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.
How to Trade on PCR to Make Money?
Now the crucial question comes that how one can trade based on PCR which will help you to make money and for that need to have historic PCR to know the extreme ends it can reach. NSE shares this data and one can see the NSE PCR data at NSE website. Let us assume that this average range for PCR over the last 1 year is in between 0.7 and 1.3. Have a look at the chart provided by NSE for PCR ratio for the month of Feb 2014One can benefit by seeing that PCR is also a contrarian strategy which believes that option buyers will typically lose money. So a typical way to analyse PCR would be:
- 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.
- 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.
We are providing below a chart which shows that how you can benefit with options strategies.
As we have stated that we do not advocate retail traders to trade in options as this segment is more beneficial for the high net worth clients and retail traders should stick to cash or future segment and trading in equity market or future market with hot stock of the day will yield fantastic returns. You can trade in Bank Nifty option tips here and can learn all about Bank Nifty tips here.
Conclusion
The Put-Call Ratio (PCR) is a technical indicator that compares the number of put options to the number of call options being traded on a stock or market index. It is used to gauge market sentiment and can provide insight into whether investors are more bullish or bearish on a particular stock or market.
Some traders use the PCR to make money by identifying trends in the ratio and taking positions based on those trends. For example, if the PCR is trending higher, it could indicate that more put options are being traded than call options, which may indicate that investors are becoming more bearish on the stock or market. In this case, a trader may want to consider short-selling the stock or buying put options.
On the other hand, if the PCR is trending lower, it could indicate that more call options are being traded than put options, which may indicate that investors are becoming more bullish on the stock or market. In this case, a trader may want to consider buying the stock or buying call options.
It's important to note that while the PCR can provide valuable insight into market sentiment, it is not a perfect indicator and should be used in conjunction with other technical and fundamental analysis before making a trading decision. Additionally, PCR can be affected by various factors such as volatility and market conditions, thus traders should use it carefully and not rely on it completely.
Also, it's worth noting that put-call ratio alone doesn't indicate the direction of the market, but rather it indicates the market sentiment, it should be used as a part of a larger trading strategy.
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