Thursday, September 06, 2007

Put-call ratio (PCR)

Put call ratio (PCR), which is the number of put options divided by the number of call options, is a popular sentiment indicator of option traders worldwide.

For starters, a put option allows the buyer the right, but not the obligation to sell a contract to the writer (seller), while a call option gives the buyer the right, but not the obligation to buy a contract from the writer.

When an investor buys a put option, it means he expects the markets to fall.
When an investor buys a call option, he expects the market to rise.

So, a rising PCR would mean investors are buying more puts or reducing calls.
And a falling PCR would indicate that call options are being added and put options being reduced.

This plunge reflects a bullish sentiment, as the put-call ratio is one of the best gauges to judge oversold (too bearish) or overbought (too bullish) zones.

......more to come........................
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