An interesting tool for every traders arsenal is the put-call ratio. This is basically a sentiment indicator. Using this you can gauge the mood of the option buyers. And as statistics show us most option buyers are losers in the long run, it is pretty useful as a contrarian tool. It is very simple to measure. It is nothing but a ratio of the traded volume of put options to that of call options.
The way you interpret it is simple. A high ratio, that is, more puts are traded, implies the sentiment is bearish. And as a contrarian trader you form a bullish opinion. It is as simple as that.
Incidentally the NIFTY put-call ratio was at 1.97 yesterday. That gives you an idea why we had a bull run today.
Like all indicators it is not a perfect tool, but pretty useful if you keep it in mind while trading.
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