Put-Call Ratio (PCR)

The put-call ratio measures the tilt of the option market toward puts or calls. A high ratio means more put activity than call activity. In the traditional sentiment reading, very high put activity is fear and a candidate contrary bullish condition, and very low put activity is complacency. The tradition is rough. Puts are also bought as hedges by investors who remain long the shares, so a high ratio can mean "protected and still invested" rather than "bearish and about to be wrong." Calls are sold as well as bought. A volume ratio treats a one-lot and a hedge fund roll as activity, and an open-interest ratio tells you what remains outstanding, which is slower and often more relevant for support and resistance from hedging. In Indian index options, open-interest PCR is the figure many desks quote. Do not mix it with a volume PCR from a US equity feed and expect the same thresholds.

Plot the ratio against its own moving average or its own percentile, not against a magic number you saw in a book. Identify the underlying. A PCR on a single stock into earnings is the earnings hedge, not a sentiment reading of the broad market. A PCR on the front-month index is closer to a market-wide hedge book. Watch the change. A ratio that jumps because one large roll hit the tape should not be traded as a sudden panic. Look at the strikes. A surge in deep out-of-the-money puts is a different statement from a surge in at-the-money puts. The ratio collapses all of that into one number, which is why it is a screen and not a trigger.

Use an extreme of the ratio you actually follow as a context warning. Extreme fear is a reason to look for a long setup if the price is also showing a failure of the breakdown. Extreme complacency is a reason to trail tighter. Do not buy because the PCR is high while the index is breaking structure. Sentiment can stay extreme while price trends. Pair it with the level. For trading decisions inside the option chain, prefer open interest by strike over the single ratio. The ratio has thrown away the strike, and the strike is where the hedging actually sits.

Using 1.0 as a bullish-bearish switch. The average PCR is not 1 in most markets, because portfolios buy puts. Also fading a high PCR into a crisis that is still expanding. And reading a volume spike on expiry day as sentiment. Expiry volume is rolls, exercises, and closing trades. It is a calendar event. Compare expiry days with other expiry days if you must use them at all.

PCR does not say who is long or short the option, so it does not say whether dealers are long or short gamma. A high put PCR can be customers buying puts, which often leaves dealers long those puts and short the underlying as a hedge, or the other way around if customers sold the puts. The ratio cannot tell. It also mixes strategies, spreads, and hedges that have little directional intent. Use it as a blunt sentiment and hedging gauge. For positioning, look at open interest by strike and at a proper dealer-exposure estimate, and accept that both are incomplete.