I hope you all are doing good. Support and Resistance is the most important part of Technical Analysis. Peoples are using many different methods to drive these levels on charts. Some are using Breakout levels, Some are using trendlines and some are using averages etc.
If you are an options trader and following Open Interest, You can drive these levels based on Put Call Ratio(PCR) too. Today we’ll discuss this PCR.
The first question is “What is Put call Ratio or PCR?”
If we divide Total Open Interest in PUT option by Total Open Interest in a Call option, The value we get is called Put Call Ration or PCR.
Let’s take an example.
If we look at this Option chain of Nifty. Total Open interest in PUT Option is 4387350 and total Open Interest in Call option is 9885600. So Our PCR = Put Open interest / Call Open Interest, which is 4387350/9885600 = 0.44. This 0.44 is PCR for this series.
Now We know how to calculate PCR and we have individual strike Open Interest data too, so we can calculate PCR on any individual strike too. Like “what is the PCR of 11000 Strike Price?” The answer is simple PUT open interest divided by CALL open interest, Which is 11700/715425=0.01. So 0.01 is the PCR of 11000 Strike price. Same as we can calculate PCR at every individual strike price.
Now the Second question comes in mind is “How can we find Support and Resistance Using this PCR?”
The answer is: There are some thumb rules to track PCR. Those Rules are:
- PCR of all strikes in the range of 0.80 to 0.50 indicates an oversold market.
- PCR of all strike in the range 1.25 to 1.5 indicates an overbought.
- PCR of a particular strike below .60 is strong resistance.
- PCR of a particular strike above 1.8 indicates strong support.
Rules are very simple, You can Just write down on a paper and stick in front of your trading desk.
Now Let’s take a live example of Nifty open interest and check are these rules really working.
This is the Options chain around 12 PM. Now look at the Open interest of 10700 and 10600. PCR at 10700 is 0.56 and PCR at 10600 is 4.55. According to thumb rules, PCR below 0.60 is strong resistance and PCR above 1.80 Strong support. Now if you look at the chart of Nifty
Nifty Trading range bound until PCR at 10700 is below 0.60 and PCR at 10600 is at 4.55. As soon as 10700 PUT open interest start increasing and 10700 CALL open interest start decreasing and PCR goes above 0.60, we saw a sharp move till 10720, On the Other hand, PCR at 10600 still holding 4.55, That’s the reason we saw an upside movement not a downside movement in first half today. Now let’s look at Option chain data at 1 PM.
Now look at Open Interest at 10700, PCR almost 1 at 10700. At 1 PM look at 10600 strike price, PUT open Interest is start decreasing from 13 lakh and came till 11 lakh, which indicates that PUT writers have started square off their positions and Nifty got a sudden downfall from 10720. Now look one more time at the Option Chain after market close:
PCR at 10700 again below 0.60 which indicates a strong resistance zone, But at 10600 Still PCR is around 2 and that the reason Nifty took a halt around 10600 and closed at 10604.35. Now If we see PCR at 10600 is coming down from 1.80 level tomorrow than we can see some more downside levels.
Final Words: In Stating maybe you can find it little tricky but remember one thing once you start following you don’t need to look any other indicator to find any support and resistance and you can trade along with Professionals. Remember one thing ” Practice Makes Man Perfect” So keep practice as much as you can.
If you have any query, suggestions or feedback, please type in the comment box. I will try to solve all your queries and will follow your suggestions. your feedbacks matters a lot for me to keep me motivated.
Thanks, Guys. have a Profitable Trading!!