Put call ratio is a ratio of total traded put option against call option for a given day. This is actually contrarian indicator for near term trend, on this indicator a reading above 1 will be a bullish signal on nifty future, while ratio below 1 is a bearish signal. Whenever trader has doubt about the trend he can just look at put call ratio and get a clear trading idea. As per my trading experience, the chances that this indicator will work is more, but still we are not only dependent on a single indicator. However, a combination of few technical and sentimental indicator works well in a trending market.
Taking a trade using Put Call Ratio:
This works most of the time, as put call ratio is based on the F&O data. Where more money is involved than any other instruments. For taking a trade, I would like to look for open interest data for both call option as well as put option, here I will be confirmed about my trade. Look at support resistance level to get extra confirmation on trade. Once you have a clear trend, either uptrend or downtrend, you can take position in nifty option according to trend. In case of uptrend but nifty call option or write nifty put option; when in downtrend, write nifty call option or buy nifty put option.
Things to keep in mind:
As a options trader, it’s very common that people buy call or buy put options. As theoretically it may sound like good trading bet for buyers. But it’s actually the seller (option writers) that makes money most of the time. This is how it works, there are 2 factors that are involved:
- Time (Days to expiry)
- Movement (Trend)
Now time is the a factor that will be against you if you buy call or put options. Whereas seller or option writer has an edge over time. So chances are 66% writers will make money and only 33% that buyers will make money in trading nifty options.