Spike in put-call ratio shows Nifty may correct 1% or more in a single session

By Ram Sahgal & Ramanatha Pai

Odds of the Nifty correcting by a percent or more over a single session grew after aggre gate put call ratio (PCR) of index options hit 1.26 on Thursday. ETIG data over 11 months through July shows that Nifty has fallen 4 out of 6 times by more than a percent when the PCR was equal to or greater than 1.2. The PCR expresses the number of outstanding put to call options on Nifty.

A ratio higher than one means people are buying more put options (bearish positions) than call options (bullish positions) to hedge their portfolios or to simply bet on a market correction. But, the PCR is also a contrarian indicator as put option sellers sell puts in the belief that the market would stay flat or rise, enabling them to pocket the premium paid by buyers.

On Thursday, the market fell 8.6 points shy of its record high of 9,709.3 made a month ago. It pared its gains to close up 0.38 per cent at 9,675. Options data shows that 9700 is stiff resistance for the market while 9500 is a strong support. As of Thursday the trading range depicted by options was 9460-9770 for July.

Market analysts like Hemant Nahata of IIFL expect a sharp move either-side because of the high PCR. However, whatever the short term pauses and corrections, analysts believe the market's still in a long term uptrend.