Put Call Ratio (PCR) is one of the simplest yet powerful sentiment indicator which helps to gauge the general trend of market. It is the ratio of number of traded Put options and number of traded Call options. A value greater than 1 signifies Bearishness in market sentiment, and a value less than 0.5 indicates bullishness. Further in this article we’ll understand the theory behind Put Call ratio, and it’s calculation steps. There is an automated excel sheet attached at the end of this post which calculates Put Call ratio for Nifty and BankNifty.
Also Read: Options Max Pain Calculator Excel Sheet
Secret Behind Put Call Ratio
Put Call ratio is simply calculated using the traded volume of options. When volume of Put options is more than Call options then it indicates bearish market sentiment, and mathematically PCR is greater than 1. The reason being, investors buy Put options only if they speculate downfall in market in the near future. Similarly increased volume in Call options indicates bullish market sentiment and PCR is less than 1. Conceptually PCR is very simple, but its logical and signals market reversal correctly most of the time.
Put Call Ratio Calculation
PCR is calculated in three simple steps for any Option series:-
Step 1: Calculate the sum of Open Interest of Put options of each strike price (a)
Step 2: Calculate the sum of Open Interest of Call options of each strike price (b)
Step 3: Divide a by b
Put Call Ratio Interpretation
Even the interpretation of PCR is very straightforward.
- If PCR value is greater than 1, it indicates extreme bearish sentiment. Contrarian traders can use it to take long positions as market is oversold.
- If PCR value is between 0.5 to 1, it indicates sideways trend. It’s advisable to avoid trading during this period.
- If PCR value is less than 0.5, it indicates bullish sentiment. Contrarian traders can use it to take short positions as market is overbought.
Put Call ratio is mass favorite for contrarian traders, as it indicates reversals accurately.
Put Call Ratio Excel Sheet
This is an automated Excel sheet which calculates PCR for Nifty and Banknifty, You need not to input any values in the Excel, it will auto refresh every 5 minutes, pull the option series and calculate PCR. You just need to be connected to Internet to see the updated values.
Please see the download link for the excel sheet below:
Let us know in comments section if you have any queries.