Nifty 50 Put Call Ratio(PCR) is a financial metric used to determine investor mood in the options market.We will discuss about PCR in detail and also learn to calculate PCR in this article.
Understanding Put/call Ratio:
Put/Call Ratio (PCR) indicator was created especially to assist traders in determining the general sentiment (mood) of the market in day trading.It is the Put to call ratio of either open interest for specific period of time or volume traded in option trading, that is why it is called Put-Call Ratio in stock market.
Open Interest: Open interest refers to the total number of outstanding or unclosed options or futures contracts in a market. In simple terms, it represents the number of contracts or financial agreement that have been initiated and are still active, rather than being closed out through an offsetting trade(a transaction that effectively cancels out or neutralizes the impact of an existing position).
Volume: volume refers to the total number of shares (or contracts in the case of options and futures) traded during a specific period, typically within a trading day.
How PCR is Calculated:
The put-call ratio is calculated by dividing the total number of outstanding put options by the total number of outstanding call options. This ratio is used as an indicator of investor sentiment towards the market or a particular security.
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Here’s how you calculate it:
♦Based on Open interest of Specific Period of Time:
The Put Call Ratio (PCR) based on open interest tells us if more people are buying options to sell stocks (puts) or to buy stocks (calls). It helps traders understand market sentiment. If there are lots of puts, it might mean people are worried about the market going down. If there are lots of calls, it might mean people expect the market to go up. Traders use this info to make decisions about buying or selling stocks.
♦Based on the Volume of Options Trading:
Similarly,The PCR (Put Call Ratio ) based on options trading volume shows the balance between the number of puts and calls being traded. It indicates whether more people are buying options to sell stocks (puts) or buying options to buy stocks (calls). If there’s a high PCR, it suggests that more puts are being traded, which might mean investors are feeling cautious or bearish about the market. Conversely, a low PCR suggests more calls are being traded, indicating bullish sentiment or optimism among investors. Traders use this information to assess market sentiment and potential trends in stock prices before making trading decisions.
What Does PCR Indicator Tell Us:
♦Interpreting Market Sentiment: The PCR indicator compares the volume or open interest of put options to call options traded on a particular stock or index. A high PCR suggests bearish sentiment, indicating that more investors are buying put options, possibly anticipating a market decline. Conversely, a low PCR suggests bullish sentiment, with more investors purchasing call options, potentially expecting a market rise.
♦Identifying Potential Reversals: Extreme readings in the PCR can signal overbought or oversold conditions in the market. When the PCR reaches extreme levels, it may indicate that sentiment has become excessively pessimistic (high PCR) or optimistic (low PCR), potentially signaling a market reversal.
♦Informing Trading Decisions: Traders and analysts use the PCR indicator as a tool to assess market sentiment and make informed trading decisions. By monitoring changes in the PCR over time, traders can gauge shifts in investor sentiment and anticipate potential market trends, helping them navigate stock market fluctuations more effectively.
Nifty 50 Put Call Ratio:
You can calculate Nifty 50 Put Call Ratio manually by given data that is displayed on NSE official website by writting Option Chain nse on google.You can use this given data to calculate the nifty 50 put call ratio and predict the market on the basis of outcome you will get.
You can also see Open Interest and Volume data here and use the data to calculate the PCR.
FAQ:
1.Where to see Put/Call Ratio live chart?
Ans. You can get Put-Call Ratio live chart on NSE official website by typing Option Chain NSE on google.
2.What is PCR Greater than 1?
Ans. A Put Call Ratio (PCR) greater than 1 typically suggests a bearish sentiment in the market. This means that there are more outstanding put options compared to call options.
3.What is Open Interest?
Ans.Open Interest(OI) refers to the total number of outstanding or unclosed options or futures contracts in a particular market at the end of a trading day. It represents the total number of contracts that have not been settled by an offsetting transaction (i.e., they have not been exercised, assigned, expired, or closed).
4.What is Volume?
Ans. volume refers to the total number of shares (stocks) or contracts (options, futures, etc.) that have been traded during a specific period, typically within a day or a trading session. It represents the level of activity or liquidity in a particular security or market.