Nifty Put-Call ratio signals caution amidst foreign selling and tariff uncertainty

Mumbai: A widely-watched equity derivatives gauge is flashing caution with unrelenting foreign selling and US-India tariff uncertainty making traders reluctant to chase upsides.

The Put-Call Ratio (PCR), which shows open interest of put options against calls -on Nifty is at 0.65, swinging from 1.67 at the beginning of January-when Nifty had made a closing high, showed data from brokerage Stoxbox.

When PCR is at lower levels, it means there is more activity in Nifty calls than in puts and vice versa. Buying calls means a trader is bullish, while buying put points to downside risks. So, in theory, a lower PCR should mean bullishness.

However, in choppy markets such as the current one, a declining PCR often reflects call positions dominating over puts as traders position for capped upside by selling call options. A call writer-counterparty to the buyer- is betting on limited upsides, while a put writer looks for limited downsides. "The slide to 0.65 indicates a rapid unwinding of supportive put positions, and the introduction of fresh call writing," said Bhavya Shah, technical research analyst at Stoxbox.

Though the PCR on Nifty has recovered from 0.5 on January 8, the current reading is still showing caution.

"At the current juncture, PCR for current weekly expiry is at 0.65, showing negative sentiments among options traders as long as Nifty is trading below 26,000-26,020 spot levels, said Vipin Kumar, AVP- derivatives and technical research at Globe Capital Market. On Friday, Nifty rose 28.7 points, or 0.1%, at 25,694.3.

Put-Call Ratio (PCR) is used to gauge how traders are positioned, rather than as a straight bullish or bearish signal. It must be read along with volatility and the overall market tone.

The Volatility Index—the fear gauge—has risen 16.4% in the past month to 11.3 on Friday, suggesting traders are cognizant of the risks. Nifty has slid nearly 2.5% since January 2, when it closed at a record high of 26,328.5.
Other derivatives indicators also point to caution. The FPI long–short ratio—which compares foreign investors’ bullish (long) positions with bearish (short) bets—shows strong bearish positioning. As of Friday, only 9% of foreign traders were positioned for a market rise, while 91% were holding short positions. This shift in PCR in the past three weeks suggests that traders are cautious and are pricing in nearterm uncertainty, said Sudeep Shah, head—technical and derivative research, SBI Securities.

Shah expects Nifty to remain under pressure unless it manages a decisive close above the 50% retracement of the previous rally at around 25,900, or until the PCR improves to 0.8 or higher.

CAUTION OR OVERSOLD?
Some analysts, however, read PCR as a contrarian indicator at extreme levels. Bhavya Shah said aPCR of 0.65 also signals that the market is approaching the oversold territory. “The market has consistently bottomed out when the PCR dips towards the 0.60–0.65 zone and topped out when it exceeds 1.30. We do not see a structural change in the trend yet, rather, this looks like a classic mean reversion within the defined range. The sentiment has shifted from extreme bullishness to caution, which is usually where a healthy market finds its floor,” he said.