Where to find put call ratio

ET Secure IT. 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.

Definition: 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.

That means a reduction in the number of traded calls will increase the value of the ratio. This is significant because fewer calls being bought can push the ratio higher without an increased number of puts being purchased.

In other words, we don't need to see a large number of puts being purchased for the ratio to rise. As bullish traders sit on the sidelines, the result by default is that there are more bearish traders in the market.

It doesn't necessarily mean the market is bearish, but rather that bullish traders are in a wait-and-see mode until an upcoming event occurs like an election, a Fed meeting, or a release of economic data. The average put-call ratio for equities that is considered a good basis for evaluating sentiment.

It's helpful to watch the put-call ratio to see how the market views recent events or earnings. When the ratio is at extreme levels, it might indicate an overly bearish or an overly bullish sentiment. For this reason, some investors use the put-call ratio as a contrarian indicator. Contrarian investors use the put-call ratio to help them determine when market participants are getting overly bullish or too bearish.

An extremely high put-call ratio means the market is extremely bearish. To a contrarian, that can be a bullish signal that indicates the market is unduly bearish and is due for a turnaround. A high ratio can be a sign of a buying opportunity to a contrarian. An extremely low ratio means the market is extremely bullish.

A contrarian might conclude that the market is too bullish and is due for a pullback. No single ratio can definitively indicate that the market is at its top or its bottom. Even the levels of the put-call ratio that are considered extreme are not set in stone and vary over the years.

Typically, investors compare current ratio levels to the average over some period of time to gauge if sentiment has changed recently. Open an Account.

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