Which put call ratio to use

The indicator then spiked above 1. Spikes below. Calls are bought when participants expect the market to rise. Excessive call volume signals excessive bullishness that can foreshadow a bearish stock market reversal. The October signal worked out well, the December signal was too early and the April signal worked out well.

The chart below shows the indicator as a day SMA pink. See the SharpCharts section below for ways to make a plot invisible. There are a few takeaways from this chart. First, notice that the indicator is much smoother with less volatility. Second, the day SMA can actually trend in one direction for a few weeks. Third, the spike thresholds are set lower because of less volatility.

Fourth, the day SMA slows the indicator to produce a lag in the signals. A bullish signal occurs when the indicator moves above the bearish extreme. A bearish signal occurs when the indicator moves below the bullish extreme.

Because this moving average can trend for extended periods, it is important to wait for confirmation with a move back above or below the threshold. Waiting for this confirmation would have prevented a long position when the indicator moved above. Notice how the indicator kept on moving higher and remained at relatively high levels for an extended period of time. A blue horizontal line is set at 1. This coincided with a flat market in the first half of and then an extended decline.

The relatively elevated levels indicate a bias towards put volume downside protection or direction bet. The moving averages stayed in this range until April and then both shot above 1. Call volume increases as a rally takes hold, while put volume increases during an extended decline. For common retail investors, put call ratio is readily available from the NSE website from the following link ….

This is a general interpretation of PCR. The extreme PCR values for different indexes and stocks are different and it helps to plot daily PCR historically to identify these extreme values. For example, for Nifty , a Put Call Ratio of 1. The Put Call Ratio is generally used by traders as a contrarian indicator when the values reach relatively extreme levels. This means that many traders will consider a high Put Call ratio of say 1. But Put Call Ratio is no magic number that indicates that the market has created a bottom or a top.

However, generally traders will anticipate the market top or bottom by looking for spikes in the Put Call ratio or for when the ratio reaches levels that are outside of the normal trading range.

Want to Learn Options Trading? Well then learn from the very best! Put Call ratio studies the relationship between the number of call options and put options being traded in the market. This is significant because fewer calls being bought can push the ratio higher without an increased number of puts being purchased. In other words, we don't need to see a large number of puts being purchased for the ratio to rise.

As bullish traders sit on the sidelines, the result by default is that there are more bearish traders in the market. It doesn't necessarily mean the market is bearish, but rather that bullish traders are in a wait-and-see mode until an upcoming event occurs like an election, a Fed meeting, or a release of economic data. The average put-call ratio for equities that is considered a good basis for evaluating sentiment. It's helpful to watch the put-call ratio to see how the market views recent events or earnings.

When the ratio is at extreme levels, it might indicate an overly bearish or an overly bullish sentiment. For this reason, some investors use the put-call ratio as a contrarian indicator. Contrarian investors use the put-call ratio to help them determine when market participants are getting overly bullish or too bearish.

An extremely high put-call ratio means the market is extremely bearish. To a contrarian, that can be a bullish signal that indicates the market is unduly bearish and is due for a turnaround.

A high ratio can be a sign of a buying opportunity to a contrarian. An extremely low ratio means the market is extremely bullish. A contrarian might conclude that the market is too bullish and is due for a pullback. No single ratio can definitively indicate that the market is at its top or its bottom. Even the levels of the put-call ratio that are considered extreme are not set in stone and vary over the years. Typically, investors compare current ratio levels to the average over some period of time to gauge if sentiment has changed recently.

If the put-call ratio has fluctuated in a tight range and suddenly bumps higher, traders might see this as a sudden increase in bearish sentiment and make their moves accordingly. Advanced Technical Analysis Concepts. Technical Analysis Basic Education. Investing Essentials. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.

At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.