Put Call Ratio Identify For Stock Options
Put Call Ratio is calculated by the open interest of a particular index or stocks trading in option. By this we will be able to assume the fall and rise of an index or stock. If a large number of traders buy a call option, then the market will not go up and in the same way, if a large number of traders buy put option the market will not come down. This is a general assumption. For calculating this put call ratio can be used.
Total put option open interest / Total Call Option Open Interest = Put Call Ratio.
Stock Option put Call Ratio
The Put call ratio can be calculated for both index option and stock option. Commonly, if the put call ratio is greater than 1 then the market will be bullish and if the put call ratio is less than 1 then the market will be bearish. If the put call ratio is between 1 and 1.30 a particular index or stock will be bullish and in the same way if it is between 1 and 0.70 then it will be bearish. If the put call ratio is above 1.40 then call option will book profits and put option will come to short covering and in the same way, if the put call ratio is below 0.70 then put option will book profit and call option will come to short covering. i.e. if the put call ratio is at 0.70 or 1.40 then again put call ratio will come to 1 and at that time short covering will come in call option or put option.
Always Stock Option Put Call Ratio is Below 1
Always use the put call ratio to calculate the index i.e. nifty. According to Indian the stock market put call ratio will not be suitable for stock option because a stock option put call ratio will be below 1 most of the times. I.e. 95% of the stock options trading in NSE will have the put call ration below 1 and so if the put call ratio is below 1 do not calculate that stock will be bearish. On NSE till now 95% of the stocks put call ratio is below 1.
Why stock option put call ratio is always below 1?
The stocks trading in future and option is hedged by the investors. I.e. the stocks call option will be sold more than the put option. When call option selling is more than the put option that stocks put call ratio will be always below 1. For example, if an investor has 1000 ITC equity shares then he can go for short in any call option of ITC. So when he hedges the call option the open interest of that call option increases and so put call ratio will be below 1. This is not a scenario for ITC alone but for all the stocks. This is why put call ratio is mostly below 1 in stock option. That’s why the put call ratio in stock option will be a normal calculation and do not trade with that ratio. If we look at the put call ratio of the stocks trading in NSE it seems to be weak but that is not the truth.