Put to call ratio interpretation. Interpretation. As with most sentiment indicators, the Put/Call Ratio is used as a contrarian indicator to gauge bullish and bearish extremes. Contrarians turn bearish when too many traders are bullish. Contrarians turn bullish when too many traders are bearish. Traders buy puts as insurance.

Put to call ratio interpretation

Put Call Ratio

Put to call ratio interpretation. One way to interpret the put-call ratio is to say that a higher ratio means it's time to sell and a lower ratio means it's time to buy. However, traders also view this as a contrarian indicator. Traders know that derivatives are used to do more than place bets; they are used as insurance. If there's a lot of insurance being placed to.

Put to call ratio interpretation


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ET EnergyWorld A one stop platform that caters to the pulse of the pulsating energy. ET HealthWorld A one stop platform that caters to the pulse of the pulsating healthcare NIFTY 50 10, Drag according to your convenience. Suggest a new Definition Proposed definitions will be considered for inclusion in the Economictimes. Put Option Put option is a derivative contract between two parties.

The buyer of the put option earns a right to exercise his option to sell a particular asset. Put-call ratio PCR is an indicator commonly used to determine the mood of the options market. Being a contrarian indicator, the ratio looks at options buildup, helps traders understand whether a recent fall or rise in the market is excessive and if the time has come to take a contrarian call.

The ratio is calculated either on the basis of options trading volumes or on the basis of options contracts on a given day or period.

One way to calculate PCR is by dividing the number of open interest in a Put contract by the number of open interest in Call option at the same strike price and expiry date on any given day. It signals that most market participants are betting on a likely bullish trend going forward. For contrarians, it is a signal to go against the wind. On the flip side, if the ratio is higher than 1, it suggests traders are buying more Puts than Calls.

Unlike Call options, Put options are not initiated just for directional call. They are bought also to hedge against any decline in the market. The market sentiment is deemed excessively bearish when the PCR is at a relatively high level. But for contrarian investors, it suggests that the market may soon bottom out. On the other hand, when the ratio falls to a relatively low level, it is deemed excessively bullish.

For contrarians, it would suggest a market top is in the making. The PCR can be calculated for indices, individual stocks and for the derivative segment as a whole. For example, suppose Nifty50 Put option at strike price 8, for December expiry saw a volume of 5, contracts on a day. Suppose further that Call volume on that day at the same strike price and same expiry stood at 88, But a rise in the ratio in a rising market is considered a bullish signal.

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