Put Call Ratio (PCR) - Definition, Formula and Calculation

The stock market has many ways to understand what traders are thinking. One such way is by using something called the Put-Call Ratio or PCR. This ratio tells us how many people are buying put options compared to call options. By looking at this number, we can get an idea of whether traders are feeling scared or hopeful. It is commonly used in options trading and helps both new and expert traders. PCR is one of the tools that gives signals about the market mood. Let’s explore this more in a very simple way.

What is Put-Call Ratio?

Put-Call Ratio (PCR) is a number that shows how many put options are being traded compared to call options. A put option is when traders think the price will go down. A call option is when they believe the price will go up. So, if more puts are being traded, PCR becomes higher. If more calls are traded, PCR goes lower. This ratio helps us understand how many people are feeling negative (bearish) or positive (bullish) about the market. It’s like a mood-checker for traders.

How to Calculate Put-Call Ratio (PCR)?

There are two simple ways to calculate the PCR:

1. Using Volume of Options

PCR = Total Put Volume ÷ Total Call Volume
Example:
If there are 10,000 put options traded and 5,000 call options traded,
Then PCR = 10,000 ÷ 5,000 = 2

This means traders are buying twice as many puts as calls.

2. Using Open Interest (OI)

PCR = Open Interest of Puts ÷ Open Interest of Calls
Example:
If there are 8,000 open put contracts and 4,000 open call contracts,
Then PCR = 8,000 ÷ 4,000 = 2

This shows a higher interest in bearish trades on that day.

What Does PCR Tell Us?

PCR tells us how the traders are feeling. If the PCR is high, it means more people are buying puts – they think prices may fall. If PCR is low, more people are buying calls – they expect prices to rise. It’s like a mirror showing fear or hope in the market. But it is only one of the many tools traders use, not a guarantee.

Why Is Put-Call Ratio Important?

PCR is important because it helps investors get a quick look at what most traders are doing in the stock market. It shows the market mood – fear or greed. When used correctly, it can give early signals of a possible price change. It helps traders plan their trades better and be aware of what might come next.

PCR as a Contrarian Tool

Sometimes, PCR is used in the opposite way – called contrarian thinking. If PCR is too high, it may mean too many people are fearful, and the market might actually go up. If PCR is too low, it could mean people are too confident, and the market may fall. So, smart traders sometimes do the opposite of what the crowd is doing.

What are the Limits of PCR?

• It only shows market mood, not exact price directions.
• It may give wrong signs in highly volatile markets.
• Traders need to use PCR with other tools, not alone.
• It does not always work the same way in all stocks or indexes.
• Sometimes, options trading is done for protection, not speculation – this can confuse PCR data.

How to Use PCR While Trading?

Here are simple ways traders use PCR:

1. PCR > 1.0 (More Puts) – Market may be bearish but could soon bounce back.
2. PCR < 1.0 (More Calls) – Market may be bullish but could face profit booking.
3. PCR = 1 – Balanced view, no clear signal.
4. Combine PCR with technical charts for better results.
5. Use PCR mostly on indices (like Nifty) rather than small stocks.

Understanding PCR Readings

• PCR < 0.5 → Very bullish (too many call options)
• PCR > 1.5 → Very bearish (too many put options)
• PCR between 0.5 to 1.0 → Neutral to slightly bullish
• PCR between 1.0 to 1.5 → Slightly bearish

But remember it is not a rule, just a guide.