What is Put call ratio (PCR) ?

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ABCD of Put call ratio (PCR)

So far, we have studied ABCD of Candlestick like Marubozu & Hammer, also about ABCD of RSI, MACD. But you can’t apply these concepts to all the stocks as it will be time-consuming. Today we will learn how to find specific stocks from 1500/1600 stocks, those who are ready to start the movement on either side sooner. In short, we are going to find out stocks that are in the OVERSOLD / OVERBOUGHT zone but not as per RSI. 

Why use Put call ratio (PCR)

There are a huge number of stocks in the stock market, Especially F&O stocks. Also, it’s not feasible to check all 1500+ stocks in all sectors as it will be a hell of Time-consuming. So we have PCR ratio. PCR ratio is nothing but the Put-Call ratio. Before getting into the oversold / Overbought zone of RSI, stock shows some movement in between those zones too. To predict that movement, we need PCR ratio. Its certain value which we get through the option chain which tells us about stock is in which zone. Before knowing about PCR ratio , let’s understand what’s option chain first. 

What is the option chain ? 

When you go to the official site of NSE, you will be able to find out this option chain. Basically, in Options, you bet on stock to go either upside or downside. For the upside, you buy CE ( call option ) or sell PE ( put option) and VICE-VERSA for the downside.

The attached picture is of the Nifty50 option chain, where you can see all strike price and the data.

This option chain tells you all the detailed information about how many traders are on call / put side by Open Interest/volume. Writing ( selling of options ), unwinding ( exit from that option strike) etc. 

As the option chain concept is big, so Right now, let’s focus only on PCR ratio, which is our concern at the moment.

What is PCR ratio ? 

Open interest shows us the number of traders active with that strike price. Now for Put call ratio (PCR), our concern is the Total Interest of Call side and Put side. 

Maximum open interest on call side suggest traders are bullish on that strike price but same will act as resistance as well. Likewise , in put side it will act as support.

This picture shows the option chain of HDFC life. On-call side maximum open interest of 8,73,600 at 600 prices and on put side 2,72,500 on the put side. These two will act as resistance and support respectively for the current price of 571.35.

Now the put-call ratio is nothing but total open interest/volume on the put side divided by the call side. Let’s see how to calculate and use it for our purpose. 

How to calculate PCR ratio ?

In the above picture of option chain , you can see total open interest of HDFC life at the bottom. 

Total open interest for 

CALL = 25,33,300

PUT = 11,60,500

Now ,

 PUT / CALL ( open interest ) = 11,60,500 /   25,33,300 =  0.4580

Let’s take another example, 

See the below picture of the Banknifty option chain

Put call ratio will be , 

Total OI on PUT / Total OI on Call

= 1.565 

Now how to judge trend using Put call ratio (PCR) and it’s use ?? 

If PCR ratio is less than 0.7 it suggest oversold zone. 

If PCR ratio is near 1 it suggest Neutral zone. 

If PCR ratio is more than 1.5 it suggest overbought zone. 

Now as you have seen Put call ratio (PCR) for HDFC life is 0.458 which suggests the stock is in the oversold zone. So we will try to find the Bearish reversal sign here. Now in the daily chart, you can see the stock is near strong support of 200-day ema, formed Hammer candle which suggests some upside from here. 

Now another example of Nifty bank, Put call ratio (PCR) is = 1.565 which suggests the index just entered the overbought zone. So here we will try to find out Bullish reversal sign. 

In the Banknifty chart you can see there is a bullish Marubozu candle that broke all resistance on the upside. So currently no sign, but time to get cautious and watch for it.

 You have noticed by now That we can’t go long on Banknifty  or short hdfc life blindly.

Limitation of Put call ratio (PCR)

  1. The biggest limitation is this indicator is applicable to F&O stocks only where we can get its options chain.
  2. PCR ratio tell us stock is in which zone, not the exact trend continuation or reversal point.
  3. If the PCR value is in the oversold zone, say 0.6 then it might go down till 0.3 /0.4 as well or reverse from 0.6 as well. So we have to pair this with Candlestick, pivot point, and other technical indicators.
  4. If PCR ratio is near 1 then it’s the neutral zone. That time this indicator will be helpless to us.
  5. Less Open Interest will be less effective than PCR ratio we get from more open interest.

What we have learned in PCR ratio ?? 

✍️ Put call ratio (PCR) is nothing but OI on Put side / OI on call side. 

✍️ PCR ratio says sentiment of traders  / Overbought or oversold zone of stock.

✍️PCR ratio 

>1.5 = sentiment Bullish but getting into Overbought zone.

<1.5 = sentiment bearish but getting into Overbought zone.

 =1 tells it’s in neutral zone.

✍️PCR ratio is applicable to only F&O stock and it doesn’t tell the exact Trend reversal/continuation point. 

✍️ But it can help Bulls and bears to get cautious when it’s necessary. A wise thing will be to pair it with other technical indicators.

✍️ Make a habit of finding the PCR ratio of stock before doing its Analysis. So that your mindset will be clear what exactly to look in the chart.

Images source NSE site

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