What is the Put Call Ratio?
At its core, the Put Call Ratio is a sentiment indicator. It compares the volume (or open interest) of put options to call options over a certain period or for a specific asset — most commonly the Nifty or individual stocks.
Formula:
Put Call Ratio (PCR)=Volume of Put OptionsVolume of Call Options\text{Put Call Ratio (PCR)} = \frac{\text{Volume of Put Options}}{\text{Volume of Call Options}}
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A high PCR suggests more puts are being bought than calls — this usually implies bearish sentiment.
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A low PCR implies more calls are being traded — generally seen as bullish sentiment.
But Here’s What You Don’t Learn on Websites
Traders who’ve been in the markets for years understand this: PCR is not just a number; it’s a contrarian tool.
In classic trading literature and experience, when PCR goes to extremes, it signals exhaustion of that sentiment:
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Extremely High PCR (above 1.3 - 1.5): Too many puts means everyone is expecting a fall. But the market doesn’t reward the majority. This is often a bullish reversal signal.
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Extremely Low PCR (below 0.7 - 0.6): Everyone is buying calls and getting too bullish. That can trigger a bearish pullback.
This contrarian interpretation is backed by studies in behavioral finance, particularly how fear and greed manifest in options volume.
What Books Reveal (Not Just Charts)
Let’s bring in the book learning:
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In Option Volatility and Pricing, Natenberg explains that professional traders watch changes in PCR over time rather than a single number. A rising PCR in a falling market is actually bullish — it shows rising fear, which sets up a contrarian long trade.
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McMillan’s work also teaches that volume-based PCR (based on daily trading volume) is more sensitive to short-term sentiment, whereas open interest-based PCR is better for long-term trend insights.
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A subtle but powerful insight: in major reversals (e.g., 2008 crash or 2020 COVID low), PCR spiked, and the reversal came shortly after — this is backed by historical charts that traders study over decades.
Real-World Example (Trader’s Mindset)
Say Nifty is falling for three days straight and PCR moves from 0.9 to 1.4. You might think, “Everyone’s buying puts, it’s going down more.” But a veteran trader thinks, “Fear is peaking. Smart money will now start accumulating. Time to prepare for a bounce.”
This psychological edge is what separates algorithmic noise from human trading intuition — and books teach you this better than blogs.
How to Use Put Call Ratio Like a Pro
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Watch extremes: 0.6 or lower = overly bullish, 1.3 or higher = overly bearish.
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Check context: Is the index already overbought or oversold?
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Combine with open interest: Rising PCR with rising OI in puts = panic. Falling PCR with increasing call OI = greed.
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Never use PCR alone: Use it with indicators like RSI, volume breakouts, and support/resistance zones.
Final Thought
The Put Call Ratio is a simple number but a complex signal. It’s not just about math — it’s about market psychology. Books on trading teach us that what everyone knows is not worth knowing. When the crowd panics and PCR hits extremes, that’s your cue. Not to follow the herd, but to listen to the fear… and act before the crowd changes direction.
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