Sunday, September 19, 2010
Put Call Ratio and the Nifty
The definition of Put-Call Ratio (PCR) is as follows:
The ratio of the volume of put options traded to the volume of call options traded, which is used as an indicator of investor sentiment (bullish or bearish).
1 school of thought says that a high PCR means more number of Puts have been written and markets should go ahead. Another school of thought says the converse.
Lets go by the data in hand for past 1 year.The market has bottomed when PCR was around 0.8-0.9 and topped when it was 1.2 or above.
I have marked in black the instances where the PCR was above 1.2. At this point of time, the market remains flat for a day or 2 by which time the PCR comes down to lower level or the market tanks.
This last leg of rally, the PCR was low (below 1.2), thus allowing the markets to go higher. On Friday, it crossed the Danger mark of 1.2, thus indicating caution.
Going by that logic next week should be flat or down. Let us see what comes true.