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How to Use Put Call Ratio to Make Money in Market?

Market has given us ample tools to analyse the market but remember that these tools have to be used in correlation with other technical analysis tools to arrive at the correct picture.

One such tool is put call ratio which indicates the prevalent trend in the market for an index or a stock.

Remember to use the same in correlation with the tools specified in the procedure to become a technical analysis here.

Put-call ratio (PCR)

Put-call ratio (PCR) is computed by dividing the number of puts (contracts) by the number of calls (contracts). Since the strike price of options is exchange-determined, the number of calls is indicative of buying interest and puts the selling interest.

  • If calls are more than puts, the market is bullish, and the PCR is less than 1. 
  • As the markets move down, PCR increases, indicating bearishness.
  • PCR is used as a contrarian indicator by traders, when it trades at extreme values. 

How to use Put call ratio to make money in market?

PCR close to 0.9 or more indicates a very high level of bearishness, and traders may be willing to take contrarian bets that the market would bottom out. Very low PCR at 0.6 or less indicates a high level of bullishness and can be interpreted as an overbought market.

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