How To Read Open Interest, Put Call Ratio, And Volatility

In: Stock Market

1 Apr 2008

Open Interest is an important indicator that can help one in ascertaining the flow of funds.

  1. If the open interest rises with rise in price it is a bullish indication.
  2. If open interest rises and prices fall it is a bearish indication.
  3. If open interest falls and prices rise it is a sign of short covering by bears.
  4. If open interest falls and prices also fall it is a sign of profit booking by bulls or liquidation of positions.

Put Call Ratio is an important indicator that can help one in gauging the future direction of the market.

  1. If the Put call ratio rises then there is hope of higher prices in the near future.
  2. If the Put call ratio falls it is a sign of weakness in the market.
  3. Generally put call ratio is read along with volatility.
  4. PCR can be calculated for Open Interest/positions or no of puts and calls traded.
  5. Historically – 1.06 -2.00 is bullish. Above 2 and below 1.06 one may expect a sharp fall.

There are two types of Volatility – historic volatility and implied volatility. Historic volatility is based on historic prices of the futures and implied volatility is based on the volatility calculated from options i.e. volatility implied by premiums in options.

  1. If volatility rises and PCR falls, it has bearish implications.
  2. If volatility falls and PCR rises, it has bullish implications.

8 Responses to How To Read Open Interest, Put Call Ratio, And Volatility

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DR.NITIN.BHUJBAL.

March 25th, 2009 at 09:36

GOOD WORK MAHESH SHORT AND SWEET EXPLAINATION OF BASIC THINGS IN MARKET ,I M INTRESTED IN READING MORE ON PCR, VOLATILITY & RELATION OF OI TO VOLUMES ,IF ANY LINK OR BOOKS FOR THE SAME PLEASE MAIL ME. THANKS.

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Mahesh Mohan

March 25th, 2009 at 09:42

I’ve forwarded a power point presentation to your email. Please have a look.

Thanks!

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gerald A

May 8th, 2009 at 12:30

a good article mr mahesh but how do you calculate the open interest put call ratio.

I hope you will clarify the same with an example thanks

my email address is gerald18@rediffmail.com

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lok

May 30th, 2009 at 20:31

i too would like to have the ppt presentation on PCR. Kindly send it across. many thanks.

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lok

May 30th, 2009 at 20:31

my email is loke12k@gmail.com

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angsuman bhattacharya

June 13th, 2009 at 21:22

i want to now about open interest and pricing relationship and how do i come to a point of decision to purchase or sell a stock. also i want to know the relationship betweel future and option. for example one told me that when large no. of put option is there in a stock the price should go up because of hedging. that means in the future markets the stock must be purchased. is it so? pl. show me the light if u can.

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Mahesh Mohan

June 13th, 2009 at 21:27

Hey angsuman,

But I am not that good in F&O. I suggest you to ask your broker. That question can be answered only by someone who are active in F&O.

- Mahesh

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Ravi

June 30th, 2009 at 15:41

Clean work dude….I also interested in same articles.
Appreciate if could send me.

God Bless

-Ravi

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