One way to calculate PCR is by dividing the number of open interest in a Put contract by the number of open interest in Call option at the same strike price and expiry date on any given day.
PCR (OI) = Put open interest on a given day/Call open interest on the same day
It can also be calculated by dividing put trading volume by call trading volume on a given day.
PCR (Volume) = Put trading volume/call trading volume
PCR for marketwide positions can also be calculated by taking total number of OI for all open Call options and for all open Put options in a given series.
Description: A PCR ratio below 1 suggests that traders are buying more Call options than Put options. It signals that most market participants are betting on a likely bullish trend going forward. For contrarians, it is a signal to go against the wind.
On the flip side, if the ratio is higher than 1, it suggests traders are buying more Puts than Calls. Unlike Call options, Put options are not initiated just for directional call. They are bought also to hedge against any decline in the market.
The market sentiment is deemed excessively bearish when the PCR is at a relatively high level. But for contrarian investors, it suggests that the market may soon bottom out. On the other hand, when the ratio falls to a relatively low level, it is deemed excessively bullish. For contrarians, it would suggest a market top is in the making.
The PCR can be calculated for indices, individual stocks and for the derivative segment as a whole.
For example, suppose Nifty50 Put option at strike price 8,000 for December expiry saw a volume of 5,609 contracts on a day. Suppose further that Call volume on that day at the same strike price and same expiry stood at 88,220.
In this case, the PCR would be
5,609/88,220 = 0.06
Now suppose the Put open interest for the same expiry and strike price stands at 4,310,600 and Call open interest stands at 6,816,250.
The PCR in this case would be
4310600/6816250 =0.63 (See table above)
If the ratio is high in a falling market, it reflects how bearish the sentiment is. But a rise in the ratio in a rising market is considered a bullish signal.