How is Put-call Ratio Calculated?īefore learning about the put call ratio formula, it is crucial to understand the components of this ratio individually. For instance, the put option provides traders with the right to purchase assets at prefixed prices, whereas, the call option offers the right to purchase assets at the current market prices. Based on open interests of a specific day It is calculated in these two following ways –ġ. PCR is computed by dividing open interest in a put contract on a particular day by open call interest on the very same day. PCR (OI) = Put open interest/ Call open interestĢ. PCR (Volume) = Put trading volume/Call trading volume Here PCR is computed by dividing the put trading volume by the call trading volume on a specific day. Here, Put volume indicates the total put options initiated over a specific time-frame. Conversely, Call volume indicates the total call options initiated over a specific time-frame. Notably, the interpretation of this said ratio differs as per the type of investor. Take a look at this example below to understand the put-call ratio calculation better. PCR = Total put open interest/ Total call open interest The puts and calls initiated are as follows – Type of option Mr Kumar, an investor, plans on using the put-call ratio to measure the market sentiment of a particular security. Since the outcome is less than 1, it indicates that investors are buying more call options when compared to put options. It further symbolises that investors are forecasting a bullish trend in future. It must be noted that the put options prove useful for hedging market weaknesses or helping traders to take chances on the market decline. A PCR above 1 indicates that put volume has exceeded the call volume.On the other hand, call options are used extensively to hedge against the strong suit of the market or simply to bet on its advances. A PCR below 1 indicates that call volume exceeds the put volume.It indicates an increase in the bearish sentiment. Nonetheless, it must be noted that a PCR of 1 is not a reliable point to measure the market sentiment. It is because more traders tend to buy call options than put options. 7 for equity options is deemed to be suitable for assessing the market sentiment. 7 or 1 signifies that more traders are purchasing put options when compared to call options. With the build-up of bearish sentiment, more investors either hedge their portfolios in case of sell-offs or speculate a falling market. PCR aids traders to understand the direction of the price movement of underlying securities.It serves as an efficient tool that helps to determine the market sentiment prevailing at a given time.These pointers below highlight the importance of PCR in brief – Conversely, a falling put-call ratio below.
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