Heckyl Alpha Pulse

How PCR and Volume trends can help generate profitable ideas?

Posted on January 2, 2016 Updated on January 2, 2016

PCR OI and PCR Volume, combined with a detailed actual volume study can be one of the most profitable strategies employed. This can be used to understand where a combination of three different indicators can be used to accurately predict the movements in the short-term.

PCR OI or the Put Call Open Interest Ratio is the ratio of total open interest of puts to total open interest of calls whereas PCR Volume is the ratio of put volume to call volume for that stock or an index. While monitoring PCR OI and PCR Volume is generally used to provide valuable insight to traders, with both more than 1.4 being seen as a bearish indicator, with most of the market participants being confident of the continued uptrend and one can go contrarian by buying puts/selling calls to benefit from the impending fall because of over optimism.

Similarly, a PCR ratio of 0.6 or less is seen as bullish, primarily because excessive pessimism exists in the market and a reversal is pending soon. The correct strategy in this case would be to write puts/buy calls and benefit from the impending reversal, which is bound to happen, with the short cover that will happen.

We present a case study of Aurobindo Pharma Ltd. On 10^th of December, 2015, where a late up movement in future price could have been confidently predicted early in the morning and money could have been made.

If we look at the early morning PCR OI and PCR Volume, both were very close to 0.6, suggesting an impending bullish move. The market participants were very bearish about the future and hence, the right strategy would have been to buy the future or sell a put.

However, this information can be strengthened by another parallel development: Volume of future being traded. While the market was bearish and the stock was going down, volume dried up, indicating decrease in the number of participants who were willing to bet on continued downtrend.

The volume declined with decline in future prices, from 155,400 at 9:29 am to 58,100 at 9:49 am, with a fall in futures price from INR 797.45 to INR 792.95, as it can be seen on the company page:

Combining this with low PCR and one can infer that at lower prices, there were not many takers and the number of sellers actually decreased with a drop in price: An up movement was imminent. Buying at INR 792.95 levels at 9:49 am would have been a prudent move.

Now, at 15: 24, near closing, the price had moved to INR 811.80, suggesting an intra-day profit of 2.4%.

The F&O solution of Heckyl is available on its Platform, FIND or Financial in News and Data. FIND’s F&O tools can help a trader to make profitable trades on-the-go in the market. To know more, mail us at info@heckyl.com.