VOLUME PCR

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The Put-Call Ratio (PCR) is a powerful market sentiment indicator used by traders, analysts, and investors to assess whether the broader market or a specific asset is leaning bullish or bearish based on options activity. It is derived by comparing the trading volume or open interest of put options to call options over a defined period of time.

Put options give investors the right to sell an asset, often used as a bearish strategy or for protection. Call options give the right to buy an asset, representing a bullish stance.

When traders are buying more puts than calls, it suggests fear or bearish sentiment. When call volume exceeds put volume, it typically indicates optimism.

Put-Call Ratio (PCR) – FAQ

PCR is calculated by dividing the number of put options traded (or outstanding) by the number of call options traded (or outstanding). There are two main types:
  • Volume-based PCR: Uses daily trading volume to reflect real-time sentiment shifts.
  • Open Interest-based PCR: Uses the total number of outstanding contracts to reflect longer-term positioning.
PCR = Put Volume ÷ Call Volume
or

PCR = Put Open Interest ÷ Call Open Interest

A high Put-Call Ratio, generally above 1.0, suggests that traders are purchasing more puts than calls. This is usually interpreted as:
  • A sign of increased bearish sentiment in the market.
  • Potential hedging activity from institutional investors.
  • Fear or caution among retail participants.
However, when PCR values rise too high (e.g., above 1.3), it can indicate that the market is overly pessimistic. This is where contrarian traders may see it as a signal for a possible upward reversal.

A low PCR (typically below 0.7) means call options are dominating put options in terms of volume or open interest. This usually reflects:
  • Strong bullish sentiment or confidence in upward price movement.
  • Retail enthusiasm and aggressive positioning in calls.
But if the ratio drops too low, it might signal **overconfidence**, and the market could be susceptible to a reversal as expectations become overly optimistic.

While PCR is a valuable tool, it is most effective when used in conjunction with other indicators such as price action, volume, technical chart patterns, or macroeconomic context. It is not a standalone signal.

Many traders use PCR as a **contrarian indicator**, especially at extremes. For instance, very high PCR values may indicate panic and a bottoming out, while very low values might reflect euphoria and potential market tops.

Volume-based PCR measures the ratio of puts to calls traded on a particular day. It is sensitive to short-term sentiment and intraday events.

Open Interest-based PCR, on the other hand, reflects how market participants are positioned over time. It provides a better sense of broader investor positioning and trend conviction.
📊 Volume-Based PCR

This is calculated using the trading volume of put and call options during a specific day. It is ideal for capturing short-term sentiment and intraday shifts in trader behavior.

Formula: Put Volume ÷ Call Volume

📈 Open Interest-Based PCR

This type is based on the total open interest (outstanding contracts) of puts and calls. It provides a broader and longer-term view of how traders are positioned.

Formula: Put OI ÷ Call OI

While thresholds may vary by market segment (index vs. stock), these are generally accepted benchmarks:
  • PCR > 1.3: Indicates excessive bearish sentiment, possible bullish reversal.
  • PCR < 0.7: Suggests over-optimism, watch for corrections.
  • PCR ≈ 1.0: Balanced sentiment, no dominant direction.
PCR ValueSentimentMarket InterpretationPossible Trading Implication
0.5 – 0.7BullishTraders are favoring call options; confidence is high.Market could continue rising, but caution if overly optimistic.
~1.0NeutralEqual interest in puts and calls; balanced sentiment.Indecision in the market; wait for confirmation.
1.0 – 1.3BearishPut volumes exceed call volumes; growing caution.Potential for downside; consider defensive strategies.
Above 1.3Extremely BearishExcessive pessimism; puts heavily favored.Possible contrarian signal — watch for bullish reversal.
Context matters: comparing current PCR to its historical average for the asset can yield better insights.
© 2025 Stockestics   |   All Rights ReservedIllustrations by Freepik
© 2025 Stockestics   |   All Rights Reserved
Illustrations by Freepik