Options Volume Put Call Ratio; a quick glimpse at market bias: Shubham Agarwal

Options Volume Put Call Ratio

Shubham Agarwal

All of us traders keep looking for insights into market expectations. For this, we use various data points. These data points include a lot of trade data as well. By trade data, we mean all the ingredients and results of the trades. This includes Orders, Volume, Price, Bid, Ask, Bid Quantity, Ask Quantity, etc.

We will talk about one such highly looked-at data point of Volume. The volume of options especially is really interesting. This is because of the types of options. Call option particularly signify Bullish bias, while Put options particularly signify Bearish bias. The Volume PCR is a single number made up of both of these volumes.

Volume PCR = Total Put Option Volume / Total Call Option Volume

Here, Total Volume refers to the volume of all strikes and all expiries of Call or Put options.

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Shubham Agarwal

CEO and Head of Research|Quantsapp Private Limited

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As we all know, the volume of Put and Call Options helps us identify Bearish and Bullish bias. Here, a higher ratio means a higher volume of Put options compared to Call Options. On the other hand, lower ratio means a lower volume of Put options compared to Call Options.

There are 3 key characteristics that we should consider making use of this trade data.

1. Historically we have seen that dominance of either Call or Put volume continues for a short period of time. This is just like a short-term trend that continues for at least a few days before the reversal or pullback takes place.

2. While the stocks can go up and up. This means that 10 can become 100 and 100 can become 1000. Volume PCR is such trade data that moves only in range. For example, for Nifty it has been seen moving in a fine range of 0.7-1.3 in the last 3 years.

3. Last and the most important characteristic of Volume PCR is that it is negatively correlated with the underlying. This means that Volume PCR often rises during the fall in the underlying and often falls during the rise in the underlying.

These 3 points will help us create such a relationship between Volume PCR that can help us draw insight out of this trade data.

Does Volume PCR make underlying rise or fall or does underlying make Volume PCR rise or fall is not very important? What is important is, the relationship is negative and the fact that Volume PCR moves in a range.

Now add these 2 characteristics and we get a decent indicator on our hands. Range-bound mover Volume PCR has a very high probability of turning down from a recent top or turning up from a recent bottom.

Now, if we simply follow this and as soon as we see Volume PCR at a recent top (where there are higher chances of it falling from there), we create a bullish view for the underlying. This is because falling Volume PCR is always seen alongside rising underlying.

Similarly, as soon as we see Volume PCR at a recent bottom (where there are higher chances of it rising from there), we create a bearish view for the underlying. This is because of the negative relationship.

I have seen this indicator performing with a decent 60-70 percent accuracy. One may not base their trades on Volume PCR but it sure helps with a quick glimpse at market bias.

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