Mint Explainer: Why all eyes are on this market indicator ahead of poll results
Mint gives a lowdown on this important indicator. Like futures contracts, options derive their value from cash shares and spot indices like the Nifty and Bank Nifty. The equity market has two segments: the capital market segment, where shares are bought and sold, and the derivatives segment, where stock and index futures and options contracts are traded or hedged.
Options contracts are of two types: calls and puts. Call option contracts enable the purchase of an underlying share or index at a pre-set price for future delivery, while puts facilitate the sale at a pre-set price for future delivery. Since indices can't be delivered, they are cash-settled.
Calls are purchased on expectations of a rally, and puts on expectations of a pullback or correction. There are two critical aspects to consider: call and put sellers assume unlimited risk for earning a relatively low premium (the price paid by the buyer), and unlike futures contracts, options lose value over time. The longer you hold the contract, the more time decay erodes its price.
Sellers, often more experienced than buyers, assume unlimited risk. They are typically proprietary traders or high net worth investors using sophisticated algorithms. Option buyers, largely retail investors, face a maximum loss of the premium paid.
It is said that sellers win eight out of ten times, while buyers succeed only two times out of ten. PCR is the total number of put options divided by the total number of call options in an option chain, indicating whether there are more puts relative to calls or vice versa, thus reflecting the market's mood. Looking at the Nifty option chain for the 6 June weekly expiry (each monthly derivatives series usually has four weekly expiries), we find
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