Magic of the PCR (putcall-ratio)

PCRmagicfinal
the magic of PCR

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.

the magic of PCR
the magic of PCR

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 –>

pcr_turnaround

24 thoughts on “Magic of the PCR (putcall-ratio)

  1. LO ! we just wrote this article on Friday indicating that markets could up as PCR was low & markets were over cautious. Today’s Monday, and NIFTY is up 100 points!

  2. Hi, As u said 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. What are those parameter?

    • Yes of course.. you need option volume to use PCR effectively.. for that you can see in the option Chain of the symbol if there are total 500+ or 1000+ option contracts trade in all at least

    • for IV we use black-scholes formula to calculate IV for each strike, using futures price for underlying & zero interest rate ( since all are European options)

      then we apply a volume-weight and calculate overall IV of a symbol through a volume-weighted avg of IVs across strikes to arrive at one common IV for that stock/symbol

      i.e. IVsum = (IV1*Qty1) + (IV2*Qty2) + ……………… (IVn * Qtyn)
      QtySum = ( Qty1 + Qty2 + ……….. QtyN)

      IVavg = IVsum / QtySum

      where 1,2,…N represent individual strike contracts

      IVs of Calls & Puts are calculated using weighted avg IVs of just calls & Puts respectively

  3. 1)How are we going to adjust change of expiration.Have you factored in the changes that happens a day before expiry and a day after expiry.In change of months the data may change significantly,which may change the PCR graph pattern.
    2)Does it behave the same way in stocks also.

    • the PCR is auto adjust at expiry, as all expired contracts OI is removed from the formula on expiry. So yes the PCR does reduce, but the extent/level of reduction is an indication of the open ground available for the long/shorts to build up ( so the change in PCR levels / reversal in PCR trend is what one should look for) … primarily indicating that option writers are willing to write relatively either more puts or more calls. If you notice, the PCR levels also reverse in mid of expiry many times in the last few years of observation, where the NIFTY trend has revered in the middle of expiry
      see the above image in the post /replies where PCR trend has reversed many times in mid of expiry also 1day ‘before‘ the actual NIFTY reversal

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s