As the name suggests, it is the ratio of all the Puts/Calls traded every day and one just need to a little of mental arithmetic to arrive at the figures. It is worth mentioning here that if the ratio is more than 1, it means that more puts have traded during the day and if it is less than 1 it means more calls traded during the day.
How to Trade on PCR to Make Money?Now the crucial question comes that how one can trade based on PCR which will help you to make money and for that need to have historic PCR to know the extreme ends it can reach. NSE shares this data and one can see the NSE PCR data here. Let us assume that this average range for PCR over the last 1 year is in between 0.7 and 1.3. Have a look at the chart provided by NSE for PCR ratio for the month of Feb 2014
One can benefit by seeing that PCR is also a contrarian strategy which believes that option buyers will typically lose money. So a typical way to analyse PCR would be:
- If PCR is below 1, it would mean that more calls are being traded and since more calls are being traded by the retail traders (option buyers) this could mean that the markets might do the opposite which is go down. Lower than 1 the PCR is, higher the chances of the market coming down. Since you know that historically PCR has been in the range of 0.7 to 1.3, at 0.7 PCR the chances of the market coming down will be the highest.
- If PCR is above 1, it would mean that more puts are being traded and since more puts are being traded by the retail traders (option buyers) this could mean that markets might do the opposite which is go up. Higher than 1 the PCR is, higher the chances of the market going up. Since historically PCR is in the range of 0.7 to 1.3, at 1.3 PCR the chances of market going up will be the highest.