Put volume and Call volume are compared using volume PCR. If put volume is larger, the ratio will be lower, and vice versa, if call volume is higher.
It has always been successful to gain insights into what players in futures and options are expecting from the underlying by using data analytics. Volume Put Call Ratio is one such indicator that provides information on short-term attitudes.
Total Volume of Put/Total Volume of Call (VOL – PCR)
One must keep in mind that volume grows with every transaction, unlike OI (open interest), which reduces when contracts are resolved and increases when additional contracts are available. The logic is now quite straightforward. Volume by itself does suggest substantial activity in the instrument, even when numerous other parameters, like OI, are taken into account.
Volume PCR contrasts Put volume with Call volume using the same reasoning. If put volume is larger, the ratio will be lower, and vice versa, if call volume is higher. It should come as no surprise that if activity, also known as volume, in Calls is higher, an anticipation of upward momentum might be built. On the other hand, if volume is more on the put side, it is possible to anticipate downward momentum.
Another feature that has been noticed over the past few years is that Volume PCR exhibits mean reversion in nature, similar like Open Interest Put Call Ratio. In plain English, it travels in the range overall.
Briefly stated:
Volume PCR and the Substrate often have a negative correlation. When Underlying is Falling, it is Rising, and when Underlying is Rising, it is Dropping.
Increasing VPCR Indicates More Puts than Calls are being traded – Because PUT traders are hedging more, traders have a negative outlook.
Dropping VPCR = More CALLS than PUT are traded; traders’ outlook is bullish as a result of the bullish wagers placed by CALL traders.
Last but not least, the day’s volume comes to a stop at night, thus this indicator still serves as the end of the day.
The next concern is how to trade it.
Volume PCR is mean reverting in nature, as we previously discussed. Although the range may not be uniform, it is possible to discern repeated patterns of ups and downs that are comparable.
A simple hint can be drawn out of this rangebound movement. This is what a plot of the volume PCR would look like.
. The…………….. All we have to do is watch for the bottom to form, and the increase in Volume PCR may even alert us before Put activity picks up and demonstrates negative short-term thoughts. Similar to this, short-term bullish feelings might be detected on the decline from an instant top.
While if volume PCR is only a short-term sentimental indication, it is still highly useful. A recent rise in Volume PCR with Nifty at or around 18000 in mid-February 2023 was a perfect illustration of why one should continue to pay close attention to this emotive signal.
Last but not least, creating this data is simple, and as it needs to be done just once each day, it is simple to obtain via NSE’s end of day Bhav. As an alternative, this indication is often included in option analytical programmes.
