The Put-Call ratio (PCR-OI) has a very simple definition
PCR = Open Interest of ALL Puts
Open Interest of ALL Calls
Albeit its simplicity, it is a very powerful indicator, as it actually gives a sense of where the market is heavy –> on the buy or sell side.
Remember we use the PCR of OI (open int.) and NOT volume.
Since OI by its nature itself is cumulative, (i.e. builds up over trading sessions) and has the inherent property of quantifying positions being ‘open’ i.e. how much money is at stake.
So, any pressure from either bulls or bears can take the market in their direction.
It is just that who has the upper hand & takes the lead, and of which we can get a sense of understanding through the magic of PCR 🙂
My observations are highlighted in the picture below.
NOTE: Like any other indicator, this is not to be seen in isolation, but used as a confirmation along with other parameters to confirm any view on the market.
Today on 18 Sep 2014, Markets again went up almost 2%.. but just see what was happening in PCR ( a U-turn) a day before from 16th to 17th sep. which is generally a signal of trend reversal in the making –>