Option - Put/Call Ratio (PCR) indicator

In our quest to update our knowledge in stock market trading & in turn to maximize our profits, we will study yet another tool to gauge the future trend.

After understanding Open Interest(OI), it’s the turn of Put/Call Ratio indicator.

Often Options are used by large players to hedge their positions & small investors used them to for their Low Risk High Return principles. Some of the experience trades use different strategies using options; like straddle, strangle for arbitrage returns. Ironically, on records 90% of options expire in loss. Well, is it because of the same principle for which small investors invest in it – low risk or because of the human tendency of “UMEED PE DUNIYA KAYAM HAI”. There are more psychological reason then technical for it which are out of the scope of this article & can be discussed some times ahead.

Options; apart from other reason; can be watched as a very effective predictive tool for the market trend.
This PCR indicator serves as a contrarians tool for market direction. PCR is basically an ratio of total number of PUT options traded against total number of CALL options per day basis. Higher ratio indicates more PUT options traded than CALL & vice versa.

As mentioned earlier, it’s a contrarian’s tool; so when the ratio is highest it’s the time to start bottom fishing & when the ratio is lowest its better to cash in on your profits.

Observe the PCR line & Nifty on a same scope & you will be amazed by the predictive power of this indicator.

As always, it goes without saying that other indicators need to be observed along with PCR for further confirmation & proper timing. Initiating action without proper understanding of Options & other indicators can lead to wrong trading decisions.

Please go through Disclaimer on this blog.