Basic Understanding of Put Call Ratio, Put Call Ratio Indicator uses to know overall mood of market.
PCR Put Call Ratio of option chain in the derivative market will explain the market sentiment of traders. The put-call ratio is a measurement that is widely used by investors to gauge the overall mood of a market. Put writers/sellers writes put when he believes the market will go up and he expects a bullish scenario in the market, and other side Call writers/sellers write Call when he believes the market will have resistance to go up and he believes slowness/bearish scenario in the market.
Overall PCR ratio will show the value either greater than 1 ( > 1) or less than 1 (< 1), you can calculate this ratio for any index like nifty 50 or for any individual stocks which play in the derivative market with option instrument, you can get option chain matrix on website www.nseindia.com.
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Basic Understanding of Put-Call Ratio : The put-call ratio is calculated by dividing the number of traded put option contracts by the number of traded call option contracts.
You can calculate this ratio by below formula : PCR = Put of all strike price of all months (near, next, far) / Call of all strike price of all months (near, next, far)
Example : PCR ratio calculated for 21-Feb-20 of all strikes and all 3 months expiry.
All PUT Counts ( Near, Next, Far ):
Near (27-feb-20) 26,763,900 + Next (26-March-20) 11,383,650 + Far (30-Apr-20) 717,900
Total Count = 38,865,450
All CALL Counts ( Near, Next, Far ):
Near (27-feb-20) 26,283,975 + Next (26-March-20) 6,876,450 + Far (30-Apr-20) 415,200
Total CALL counts = 33,575,625
PCR = Total Puts / Total Calls= 38,865,450 / 33,575,625 ⇒ 1.16
Conclusion: Here PCR is greater than 1 ( > 1 ) means traders seeing a bullish scenario in the market and most of the traders write/sell Put contract rather than Call, the most probably nifty index will go up, when it reaches max limit then possibility will be turned on the market on the opposite direction on that high limit of PCR depending on market and traders sentiment, you need to monitor this value on a daily basis to know market movement and can take your position accordingly.
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