The Put-Call Ratio (PCR) compares activity in put options with activity in call options. Most commonly by dividing total put open interest (OI) by total call open interest for an index or stock. Traders watch it as a rough gauge of market sentiment, though what it "says" is a convention, not a rule.
How is PCR calculated?
The OI-based version, which is what most Indian traders mean by PCR, is simply:
PCR = total put OI ÷ total call OI
Say Nifty 50 options show put OI of 1.2 crore contracts and call OI of 1.5 crore contracts across strikes. PCR = 1.2 ÷ 1.5 = 0.80. A PCR below 1 means call OI outweighs put OI; above 1 means put OI is heavier. (A volume-based PCR also exists (same formula using the day's traded volumes) but it's noisier and less commonly quoted.)
If puts and calls themselves are still fuzzy, read What are call and put options? first, and What is open interest (OI)? for what OI does and doesn't measure.
What do high and low PCR readings conventionally mean?
The straightforward reading: puts are often bought as bearish bets or as portfolio insurance, calls as bullish bets. So:
- A rising or high PCR is conventionally read as bearish positioning building up, more money committed on the put side.
- A falling or low PCR is conventionally read as bullish positioning, the call side dominating.
But there's an equally traditional contrarian reading that flips this at extremes. When PCR gets unusually high, contrarians argue that pessimism is already crowded ("everyone who wanted to hedge has hedged") and treat it as a sign the fall may be closer to exhaustion than beginning. An unusually low PCR gets the mirror-image treatment: complacency, rather than a green light.
Both readings coexist because the same number is genuinely ambiguous. Heavy put OI could be traders buying puts (bearish) or institutions writing puts to earn premium (a bet the market won't fall much, mildly bullish). OI can't tell you which side initiated the position, so PCR inherits that blindness.
Is there a "correct" PCR level to trade on?
No. You will find charts and commentary drawing lines at various levels and calling readings beyond them "oversold" or "overbought". Treat every such threshold as folklore, not fact: what counts as extreme differs across indices and stocks, shifts with market conditions, and changes near expiry as positions unwind. There is no level at which PCR reliably predicts anything.
What PCR is honestly good for is context: comparing today's reading with the same instrument's own recent range, and noticing when positioning has become lopsided. That is an observation about crowd behaviour, not a signal to act.
Things to keep in mind
- PCR is put OI divided by call OI, a positioning snapshot, not a forecast.
- The same reading supports opposite interpretations (straight vs contrarian); anyone quoting PCR as a definite buy/sell signal is overselling it.
- PCR says nothing about who holds the positions or why, hedging, writing and speculation all look identical in the ratio.
- Trading options on sentiment gauges alone is a fast way to meet the risks described in What are the risks of trading Futures and Options (F&O)?
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