As a trader, what would you give to be able to know what the rest of the market participants are doing at any given point in time? Here is this secret report card, the put call ratio of Nifty Option Chain is as close to actually having this information as a trader is ever going to find..
The Put Call Ratio measures how many put options contract s are open versus call options contrancts in the Option Chain. The formula remains the same whether it is the Option Chain of Nifty, Bank Nifty or any stock.
The formula is very simple to calculate – take the put options Open Interest (from the Option Chain table) and divide by the Open Interest of calls. This data is easily available in option chain Nifty. In the above chart we have automated the calculations for you so you can get live view of what market is thinking.
No need to use excel to download Open Interest of Puts and Calls separately and then running the formula to calculate Put Call Ratio.
Here is how I use this indicator. For the sake of simplicity, lets assume that everyone in the market is bearish at a given time and because of this prevalent feeling everyone is entering shorts in stocks, indices and even buying puts. With all market participants bearish and now sitting on short positions, a very interesting thing takes place – there is nobody left to sell. With nobody left to sell, there is no selling pressure on the market, and they start to drift higher. This drifting eventually hits the first set of stop loss orders. Now all these market participants will be using some sort of stop loss. Some will use a very tight SL, others may use medium and remaining using wide stop loss.
The group of tight stops get hit first, which generates a buying pressure taking market higher. Then the medium and finally the wide SL until all the stops are taken out.
By the time all stops are taken out the market participants turn bullish and want to remain on the long side of the market. Once everyone has bought then there is no one left to buy and the market starts to drift lower.
Here is my Golden Rule:
“If PCR ratio stays below the previous day closing PCR, then market is likely to be bearish and I look for short trade setups. If the PCR ratio stays above the previous day closing PCR then I search for long trade patterns only”
See the correlation between ‘Nifty Put Call Ratio Live Chart’ and the Nifty Spot Price. This is very useful indicator for day-trading.
For intraday trading – live PCR trend can be extremely reliable indicator.
If the PCR (Put Call Ratio) is increasing during correction in the up trending market – this is very bullish indication. It means, the Put writers are aggressively writing at dips. Look for retracement percentage of last rise during correction while keeping an eye on this chart.
If the PCR is steadily rising during the day along with Nifty spot – also considered bullish
If PCR is declining while the Nifty spot is near resistance level – bearish indication. This implies that bulls are fearful of bears.
If PCR declines during correction in the down trending market – this is very bearish indication. It means, either call writers are aggressively writing at every rise or Put writers are closing there positions cutting losses. Look for retracement percentage of last fall during correction while keeping an eye on this chart.
Here is what Investopedia has to say about using Put Call Ratio in your trading:
It is widely known that options traders, especially option buyers, are not the most successful traders. On balance, option buyers lose about 90% of the time. Although there are certainly some traders who do well, would it not make sense to trade against the positions of option traders since most of them have such a bleak record? The contrarian sentiment put/call ratio demonstrates it pays to go against the options-trading crowd. After all, the options crowd is usually wrong.