The Put Call Ratio suggesting extreme Caution!!

One of the ‘contrarian’ indicators which are tracked to gauge market sentiment during such volatile times is the Put-Call Ratio (PCR). The put call ratio is the ratio of total volume in Put options vis-à-vis total volume in Call option.

Usually when the put-call ratio is high, it may actually suggest a market rally. Conversely, when the put call ratio is low, it may actually suggest near market top and a subsequent fall. (Hence it is termed as a contrarian ratio)

The recent put call ratio movement is as follows:



As you would observe, that in May, just before the election results, the PCR had steadily risen to 1.21 – more puts were bought compared to calls.

However the current scenario suggests that the PCR is placed near its lower level at 0.83 – suggesting relatively higher numbers of calls are bought compared to puts.

Being a ‘contrarian’ indicator, the PCR may be actually suggesting extreme caution and we will be well advised to consider the signal given by PCR.

Up moves in stock prices should be used as profit booking opportunity as the PCR suggests that the markets may actually be ‘topping’ out.

Happy Volatile week !!!

CA Rajiv D Khatlawala
Head of Research & Training
JHAVERI Securities Ltd