Learn With ETMarkets: Options demystified 401 – Market sentiment

economictimes.indiatimes.com:

options. Link to previous article: Learn With ETMarkets: Options Demystified 303 — Options Greeks (Part 3) -https://ecoti.in/HGiKuY58Put-Call Ratio (PCR): She started by explaining the Put-Call Ratio (PCR), saying, " The PCR is a commonly used indicator to assess market sentiment and predict potential reversals or trends.

Traders calculate the PCR using either volume or open interest data." PCR = Put Volume (or OI)/ Call volume (or OI) Maya continued, «If we look at the volume-based PCR, we divide the total volume of put options traded by the total volume of call options traded in a given period. It gives us insights into how market participants are feeling and acting in the short term.» «Alternatively,» Maya said, «we have the open interest-based PCR.

It divides the total open interest (number of outstanding contracts) of put options by the total open interest of call options. This one gives us a glimpse of the longer-term sentiment, as open positions can last for days, weeks, or even months.

Sometimes, high open interest in put or call options indicates significant support or resistance levels for the underlying asset.»Tara was intrigued and asked, 'So, which one is better?' Maya replied, 'The volume-based PCR provides a snapshot of recent trading activity, making it perfect for short-term analysis and identifying immediate shifts in market sentiment. However, we need to be cautious as sometimes big institutional strategies can distort the PCR due to high options volume.

On the other hand, the open interest-based PCR gives insights into longer-term sentiment as it considers open positions that can last for days, weeks, or even months. Unusually high open interest in put or call options can indicate significant support