Put Call Ratio – Knowing Future Movements in Stock Market

Many people think that options can only be used for speculating or hedging; however they can also be used for predicting the future movements in the stock market. PCR also known as put call ratio can be a great tool for predicting the stock market if it used correctly. The put-call ratio is often used by the option traders or investors to measure the sentiment of the market. Put call ratio can be calculated by dividing the number of traded put options by the number of traded call options. As put call ratio increases, it can be interpreted to mean that investors or traders are buying put options rather than call options. An increase in buying of put options signals that market participants are of the view that the market will move lower, or they are hedging their portfolios in case if market goes down.

A higher put call ratio indicates that market as a whole is bearish whereas a low put call ratio signals that market view is bullish about the future. Therefore a contrarian trader will buy when the put call ratio is high in the hope that whole market is bearish and if market goes up by any reason then it will lead to short position getting covered by short sellers whereas when put call ratio is low a contrarian trader will buy the market in the hope that as there is too much pessimism in the stock market it can lead to rise in the market.

As one can see that put call ratio can be good tool for predicting the future movements of stock market, however it should be used with caution, as in stock market nobody can predict the market accurately every time.

0 comments… add one

Leave a Comment


Related pages


conglomerate companiesthe principle of absolute advantagewhat is a horizontal mergeradvantages and disadvantages mixed economydefine unsystematic riskfeatures of perfectly competitive marketnormal good inferior gooddividends defwhat is asba in bankingadvantages of fifo methoddirect and indirect quotationsunitary elastic demand curvesubvention definitionfullform of micrfmcg acronymexamples of law of diminishing returnswhat is vertical analysis of financial statementsurbanisation wikiadvantages of absorption costingfeatures of marginal costingconsumer durable goods examplesdiscounting bill of exchangedisadvantages of monopolistic competition market structurehow to write a crossed chequefounder of icici bankintroduction of barter systemjournal entry prepaid expenseadvantages and disadvantages of a loanfull form of kpmgdifferent types of liquidity ratiosdifferentiate between assets and liabilitiesdemat vs trading accountaccelerated method of depreciationcross cheque definitionsubstitute goods and complementary goodsconglomerate merger examplesautocratic leaderswhat does consignee meanadvantages and disadvantages of economic globalizationmerchant banking pptbanking advantages and disadvantagesunitary price elasticity of demandadvantages of dupont analysiscontribution pricing advantages and disadvantagesprofitability ratios formulasadvantages of autocratic leadershipdcf approachmeaning of indirect expensescapm assumptionwhat is privatisation in economicsadvantages of mixed economy in south africadisadvantages of perfect competition marketlimitation of financial accountingjournal entry for prepaid rentconsumer nondurable goodsreport on opening a demat accountmeaning of demand in hindiunearned revenue accounting entryinvestment appraisal payback periodupsell examplesfdi full formunearned revenue accounting entryfx direct quoteexamples of liability accountsnon durable good definitionclassification of elasticity of demandadvantages and disadvantages of capital budgeting techniquesdisadvantages of convertible bondsunqualified report auditexamples of diversifiable riskcalculation of net worth formula