What Is Put-Call Ratio (PCR) ?
The Put-Call Ratio (PCR) is a popular derivative indicator widely used by investors and traders to gauge the overall mood or sentiment of the market. A “call option” gives the buyers the right to buy an asset at a particular price, while a “put option” gives the buyers the right to sell a particular asset at a particular price.
PCR is computed by dividing Open Interest in a Put Contract on a particular Day by Open Interest in a Call Contract on the very same day.
PCR = Put Open Interest/ Call Open Interest
Interpretation:
A rising Put-Call Ratio or a PCR greater than 0.7 means the open interest of put contracts is more than that of call contracts. This indicates that market participants are either bearish on the market or use put contracts to hedge their holdings from any losses.
A declining Put-Call Ratio or a PCR less than 0.5 means the open interest of call contracts is more than the open interest of put contracts. This indicates that market participants are either bullish on the market.
A Put-Call Ratio of 1 indicates as many put buyers as there are for call options.
A Contrarian Indicator:
Put-Call Ratio is often used as a Contrarian Indicator in India. Excessively high or low values indicate that the market is too bullish or bearish and is due for a trend reversal.
Extremely high values suggest that the market participants are too bearish, and the market trend should reverse soon. Similarly, extremely low values indicate that the participants are too bullish, and the market could be red soon.
We have released four new scans relating to the Put-Call Ratio under the Futures and Options Scans with the new Version Update.
They are as follows:
- Stocks with High PCR: This scan will filter out stocks with PCR greater than 0.7. It indicates that bearish momentum is present in the market. It is at these price levels that contrarian participants enter into the stocks.
- Stocks with Low PCR: This scan will filter out stocks with PCR lesser than 0.3. It indicates that bullish momentum is present in the market. At these price levels, contrarian participants liquidate their positions or take bearish positions in the stocks.
- Stocks with High Increase in PCR: This scan will filter out those stocks which have an increase in PCR of at least 0.05 from the previous day. It means that the positions in put contracts are increasing.
- Stocks with High Decrease in PCR: This scan will filter out those stocks which have a decrease in PCR of at least 0.05 from the previous day. It means that the positions in call contracts are increasing.
Put-Call Ratio is an extremely important derivative metric. At StockEdge, we continuously believe in improving the user’s experience and making the users more financially literate, introducing Put-Call Ratio related Scans attempts to move a step further to meet our objectives and goals. So, if you enjoy using StockEdge, don’t hold back from sharing it with your loved ones.
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Very good explain.