What Is The Put-Call Ratio And How It Affects The Market?

by Vinaya HS on September 23, 2017

in Finance

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The term Put-Call Ratio (PCR), is an indicator or a tool which is commonly implemented to understand the mood of the options market. The ratio is taken out by dividing the number of traded put options by the amount of traded call options. When this ratio increases, it is interpreted to understand that the investors involve a lot of their money into the put options instead of putting them in the call options. The rise in the traded put options indicates that investors are either trying to theorize that the market will move further down.

How Does It Affect The Market?

The increasing ratio of the put call ratio is a clear signal that the investors are gradually starting to move towards the instruments that profit when the prices lower down rather than when they are supposed to rise. As the number of call options is the subjected as the denominator of the ratio, a decrease of traded calls will cause an increase in the value of the ratio. This is imperative because the market that indicates this is starting to loosen its outlook.

Interpreting The Put Call Ratios

The minimum amount for the nifty call put ratio is not 1.00 because of the equity options that the traders and investors always purchase more calls than that of puts. The average ratio, however, is usually lesser than 1.00 for the stock options. When the average ratio comes closer to 1.00 or more, it signals a bearish statement. More than the average number means more puts are being purchased compared to that of the calls. Some traders bet against the repressed, and the usual outlook gets bearish. When the ratio comes close to 0.50 or less, it indicates an optimistic sentiment. If the put call ratio is high in a degrading market, it reflects how bearish the sentiment is and when it rises, the market is considered as an optimistic one.

Looking At The Put Call Ratio As A Contrarian Indicator

The put call ratio can be implemented to determine when the investing traders might be getting either too much optimistic or too bearish. A high leverage put call ratio is an optimistic sign as it points to over-bearish investors and inversely.

How To Trade With Nifty Call Put?

There are two types of options in Nifty known as Call and Put. The nifty call put is the type of contracts that expire on every last Thursday of the month that has an expiry date. When you buy or sell a futures contract, you can either sell it before the expiry date, or you can hold your place open until the contract expires. Moving from the house settles the trade, and these options are known as European style options.

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