Analyzing market sentiment forms the base for decision making in Options Trading. Put-Call Ratio, one of the most widely used tools to measure sentiment, presents a view of whether a set of investors is predominantly bullish or bearish. But what exactly is the PCR in an option chain, and how does one put it to use? Let’s go ahead and discuss.
What is PCR (Put-Call Ratio)?
Put-Call Ratio (PCR) is a sentiment measure derived by dividing the open interest (OI) or volume of put options by that of call options for a particular stock or index.
Traders often consider the PCR calculated from Open Interest (OI) because OI represents positions still being held by traders, giving better insights into sentiment.
Types of PCR
- PCR based on Volume
Indicates short-term trading interest in puts versus calls.
- PCR based on Open Interest (OI)
Preferred analysis of positional and medium-term sentiment.
- Index PCR (like Nifty PCR, Bank Nifty PCR)
The Index PCRs are closely tracked by F&O traders for the purpose of getting some feel of the broader market trends.
How to Read PCR from an Option Chain?
An option chain is a table with call and put options available for a particular underlying asset. It shows parameters such as strike prices, open interest, volume, and bid/ask prices, among others.
How to calculate Put Call Ratio in stock market:
There are two well-known ways of calculating the PCR:
To find the PCR from the option chain:
- PCR (Open Interest):
- Sum the Open Interest (OI) of all Put options.
- Sum the Open Interest (OI) of all Call options.
- Divide Put OI by Call OI.
- PCR (Volume):
Most traders refer to the Open Interest PCR because it shows the outstanding positions traders are carrying.
Example:
Let’s consider the Nifty 50 option chain:
Total Put Open Interest = 60,00,000
Total Call Open Interest = 40,00,000
A PCR of 1.5 indicates that this index is bearish, but with so much bearishness, there also remains the possibility of a rally.
How to interpret PCR in options trading:
PCR > 1
When PCR is greater than 1, it means more puts are being traded than calls.
Interpretation: Bearish sentiment — traders are buying more puts expecting a price decline.
PCR < 1
When PCR is less than 1, it means more calls are being traded than puts.
Interpretation: Bullish sentiment — traders are buying more calls expecting a price rise.
PCR = 1
Equal number of puts and calls — indicating a neutral sentiment in the market.
Extremely High or Low PCR:
Very high or very low PCR values can sometimes signal contrarian opportunities — meaning the market might be overbought or oversold.
Example:
If the Nifty’s put open interest is 12 lakh and the call open interest is 8 lakh:
This suggests more traders are hedging or betting on a downside move.
However, extreme PCR values can indicate contrarian signals:
- A very high PCR (>1.5) could mean excessive pessimism → market might rebound.
- A very low PCR (<0.5) could signal excessive optimism → market might correct.
How Traders Use PCR in Strategy?
Traders use PCR to understand market sentiment and identify possible reversals.
| PCR Value | Market Sentiment | Possible Interpretation |
| < 0.7 | Extremely Bullish | May signal overconfidence — trend reversal possible |
| 0.7 – 1.0 | Mildly Bullish | Normal bullish sentiment |
| 1.0 – 1.3 | Mildly Bearish | Normal bearish sentiment |
| > 1.3 | Extremely Bearish | May signal panic — potential bottom or reversal |
Contrarian traders use high or low PCR to take opposite trades anticipating a reversal.
Why is PCR Important for Traders?
- Sentiment Gauge: Determines whether the crowd is bullish or bearish.
- Contrarian Indicator: The extreme levels of PCR interfere, thereby helping in identifying reversal zones.
- Decision Support: Helps support decision-making in options trading strategies.
Limitations of PCR
- PCR is a sentiment indicator and hence should never be interpreted as a buy or sell signal.
- It has to be read while taking into consideration the price action, support/resistance levels, and volume.
- Sudden increases in OI due to hedging or rollovers could lead to distorted PCR readings.
Practical Tip: Combine PCR with Technical Analysis
For better accuracy, combine PCR values with:
- RSI, MACD, Moving Averages
- Support & resistance zones
- Option writing data and Max Pain levels
Conclusion:
One of the strongest but simplest indications of market sentiment in the option chain stands tall in the Put-Call Ratio (PCR). While not a crystal ball, the option chain would certainly help better time your trades when coupled with technical and fundamental analysis, rather than purely going by emotion.
Whether a novice or an experienced trader, monitoring PCR values from the option chain can give a strong edge to any trader.
Frequently Asked Questions (FAQs)
1. What is a good PCR value for a bullish market?
- Pearl-chain below 1 (0.7 and 0.8) is considered a bullish bias in the market.
2. Can PCR be used for intraday trading?
- Yes, but ideally, volume-based PCR for intraday and OI-based PCR for positional trades should be used.
3. Is a very high PCR always bearish?
- Not necessarily. A high PCR might state excessive fear and set the stage for a reversal — a contrarian bullish signal.
