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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. With the build-up of bearish sentiment, more investors either hedge their portfolios in case of sell-offs or speculate a falling market. 7 or 1 signifies that more traders are purchasing put options when compared to call options. 7 for equity options is deemed to be suitable for assessing the market sentiment. It is because more traders tend to buy call options than put options. Nonetheless, it must be noted that a PCR of 1 is not a reliable point to measure the market sentiment. A PCR below 1 indicates that call volume exceeds the put volume.It indicates an increase in the bearish sentiment. 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. It must be noted that the put options prove useful for hedging market weaknesses or helping traders to take chances on the market decline. It further symbolises that investors are forecasting a bullish trend in future. Since the outcome is less than 1, it indicates that investors are buying more call options when compared to put options. 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. Take a look at this example below to understand the put-call ratio calculation better. Notably, the interpretation of this said ratio differs as per the type of investor. Conversely, Call volume indicates the total call options initiated over a specific time-frame. Here, Put volume indicates the total put options initiated over a specific time-frame. 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. PCR (OI) = Put open interest/ Call open interestĢ.
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PCR is computed by dividing open interest in a put contract on a particular day by open call interest on the very same day. Based on open interests of a specific day It is calculated in these two following ways –ġ. 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. 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. Such an investment strategy is based on the practice of purchasing or selling investment units against the prevailing market conditions, to combat mispricing in the securities market. In other words, it helps traders to understand whether a recent increase or decrease in the market is excessive or not.īased on this information, traders decide if they should opt for a contrarian call in the prevailing market. Such an indicator helps determine the extent of bullish or bearish influence in the market. This ratio is computed either by factoring in the open interest for a given period or based on the volume of options trading.Īlso known as PCR, this particular ratio serves as a contrarian indicator and is mostly concerned with options build-up. It is designed to enable traders to determine the sentiment of the options market effectively. Typically, a put-call ratio is a derivative indicator. here, we have elucidated the nitty-gritty of the same including the put call ratio formula and other facts. To understand the application and role of this financial measurement one needs to be well-versed with its basics. Put-call ratio is one of such financial tools which prove useful for investors in more than one way. Investors use several financial measures to gauge the market temperament before parking their money into the same.