**Put-Call Ratio**
A put option is an agreement between two parties to exchange an asset at a pre-determined rate on or before a specific date. The buyer of the put option has the right but no obligation to sell the asset (stock, commodity) at a specified price on or before a fixed date, while the seller has the obligation to buy at the pre-specified price if the buyer wishes to exercise the option.
A call option, on the other hand, gives the buyer of the option the right but no obligation to buy a particular asset from the seller of the call option at a fixed price on or before a particular date.
The put-call ratio is calculated by dividing the number of traded put options by the number of traded call options.
If the put-call ratio is increasing, it means the number of traded put options is increasing, signaling that either investors fear the market will fall or are hedging their portfolios foreseeing a decline.
Sahaj Agrawal, associate vice-president, derivatives, Kotak Securities, says, "A high ratio indicates an over-cautious stance by market participants and hence chances of the market falling are low. Contrary to that, a low ratio indicates over-optimism, and hence caution should be exercised."
Though these indicators are frequently used by traders and fund managers to predict market movements, they may lead to wrong results if used separately, as they are not fool-proof. You can use these together to arrive at a more credible conclusion.
A put option is an agreement between two parties to exchange an asset at a pre-determined rate on or before a specific date. The buyer of the put option has the right but no obligation to sell the asset (stock, commodity) at a specified price on or before a fixed date, while the seller has the obligation to buy at the pre-specified price if the buyer wishes to exercise the option.
A call option, on the other hand, gives the buyer of the option the right but no obligation to buy a particular asset from the seller of the call option at a fixed price on or before a particular date.
The put-call ratio is calculated by dividing the number of traded put options by the number of traded call options.
If the put-call ratio is increasing, it means the number of traded put options is increasing, signaling that either investors fear the market will fall or are hedging their portfolios foreseeing a decline.
Sahaj Agrawal, associate vice-president, derivatives, Kotak Securities, says, "A high ratio indicates an over-cautious stance by market participants and hence chances of the market falling are low. Contrary to that, a low ratio indicates over-optimism, and hence caution should be exercised."
Though these indicators are frequently used by traders and fund managers to predict market movements, they may lead to wrong results if used separately, as they are not fool-proof. You can use these together to arrive at a more credible conclusion.
