Young professionals who would like to trade in stocks often find it helpful to learn the indicators to reason more adequately and make informed decisions. One such common indicator is the PCR ratio, which simply refers to the Put-Call Ratio. When traders use it along with other effective tools such as option Greeks, the ratio provides a hint of a clue about market sentiment, which helps them frame their strategies.
What is the PCR Ratio?
This is the ratio of the total number of puts traders executed during a period to the total number of calls they traded during that period. Puts reflect bearish sentiment as they give the right to sell, while calls indicate bullish sentiment as they give the right to buy.
A PCR ratio above 1 suggests that traders are buying fewer calls than puts and is usually perceived to mean that they believe there might be a fall in the market. A PCR ratio below 1 suggests that traders have executed more calls than puts and speaks of some optimism in the market. Traders, however, should not use PCR in isolation. They should couple it with indicators such as option Greeks, technical charts, and market trends.
How Option Greeks Come Into the Picture?
The values derived from Delta, Gamma, Theta, Vega, and Rho generally refer to Greeks. The main objective is for traders to understand how the price of an option changes with time decay, volatility, and price movements of the underlying asset.
PCR shows overall market sentiment, while option Greeks break it down to how individual options behave. For instance, by way of example, if the PCR ratio shows bearish sentiment but Delta suggests that an option’s price will rise with the underlying stock, it signals that the market is mixed or undergoing a short-term correction rather than a full reversal. Understanding both provides better clarity for entry or exit on trades.
PCR Ratio and Trading Hours India
Even when traders check up on the PCR ratio, they need to keep in mind the trading hours in India. In India, major exchanges, namely NSE and BSE, open from 9:15 AM to 3:30 PM Monday to Friday. Most options trades take place within these hours, so PCR keeps lacunas throughout the day.
Traders should watch PCR at the Start, Middle, and end of trading sessions, which can give intraday changes in sentiment. It’s like if PCR rises sharply during the day, it can indicate increased caution among traders, which might not be evident if they only consider end-of-day data.
How MCX Holidays Affect Your Trading Plans?
While the PCR ratio largely applies to equity and index options, it’s good for young professionals to remember that other segments, like commodities, can indirectly influence market sentiment too. The MCX holidays list outlines days when the Multi Commodity Exchange (MCX) closes. These days, traders do not execute trades for commodities like gold, crude oil, and metals. Though this doesn’t directly affect PCR, global commodity movements on MCX holidays can create gaps in sentiment when Indian markets reopen.
For instance, if global oil prices fall sharply during an MCX holiday, it might reflect in market sentiment and the PCR ratio when the stock markets resume. Thus, keeping an eye on MCX holidays helps traders understand possible gaps in market sentiment, particularly for those trading across different asset classes.
Conclusion
The PCR ratio is among several tools that junior investors can use to make their journey easier when it comes to the complexity of the options market. Option Greeks combined with knowledge of trading hours, awareness, and understanding of the MCX holidays direct traders toward a more holistic approach to understanding market movements. Combining PCR with technical, fundamental, and global insights would help traders make a realistic investment decision, instead of depending solely on PCR. Traders, however, need to apply patience and observation when putting such tools to real-world trading applications.